Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Baidu Cuts Both Ways

By Rick Munarriz - Mar 16, 2014 at 5:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

China's dot-com darling gains in video but falls in search.

There was some big market-share news for Baidu ( BIDU -7.77% ) on two fronts last week. The good news is that it's rocking in the realm of video. The bad news is that Qihoo 360 ( QIHU.DL ) is starting to catch up in its stronghold of search.

An updated report from Chinese traffic tracker iResearch shows that Baidu's Iqiyi drew 94 million active users in March. That topples what is now the former market leader, Youku (NYSE: YOKU), which attracted 83.5 million unique users during the same month. 

This would probably be a bigger feat if video was actually lucrative in its current form. Youku's been posting narrowing deficits, but it's not expected to turn a profit until next year at the earliest. Baidu's success in streaming video and other non-search areas has helped diversify Baidu's operations, but it has come at the expense of overall margins. Revenue soared 43% to $5.3 billion last year, but earnings growth clocked in flat. The contraction of margins should continue in 2014, with revenue once again outpacing bottom-line growth. Analysts see revenue growth accelerating to 47% this year, but those same pros see a mere 9% advance in earnings per share.

Baidu's investments in online video, mobile app marketplaces, and online travel are playing a major role in expanding revenue at the expense of near-term profitability. However, it may also be masking Baidu's fading appeal as the country's search engine of choice. 

Chinese research firm CNZZ is reporting that Qihoo 360's search engine -- a platform that didn't even exist until two summers ago -- is now handling roughly 25% of the country's Web search queries. The data detailing January shows Baidu's market share slipping to 58%. This is a pretty big deal since Baidu was attracting as much as three-quarters of China's search traffic at its market share peak a couple of years ago. 

This is naturally a trend worth watching, but it's not as problematic as you may think. China's search market is exploding, so Baidu is still growing at a healthy clip. Its slice is shrinking, but the pie itself is expanding at a faster rate. Online marketing revenue soared 51% in Baidu's latest quarter. Its list of contacts is getting thicker. It had 451,000 active online marketing customers during the period, 11% more than it had a year earlier. Perhaps more importantly, the average marketing customer is spending 35% more on Baidu than it did a year earlier. In other words, Qihoo 360's success hasn't held them back from making Baidu a more important component of their online marketing strategies. If anything, Baidu's success in video and other online areas will make it that much harder to for marketers outgrow the dot-com darling. 

Investors should still keep an eye on both the online video and Web search markets. The heady pace of smartphone migration in China is rapidly expanding demand for streaming video and search queries. Baidu no longer has to be gaining market share ground on all turfs, as long as the sum of its parts continues to impress.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$137.39 (-7.77%) $-11.57
Qihoo 360 Technology Co. Ltd. Stock Quote
Qihoo 360 Technology Co. Ltd.
QIHU.DL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/05/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.