Baidu Inc.'s Big Strength: Mobile

Baidu's ability to capitalize on the proliferation of mobile use in China gives it a huge advantage against domestic competitors.

James Sullivan
James Sullivan
Jun 18, 2015 at 10:00AM
Consumer Goods

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Baidu (NASDAQ:BIDU) is the sixth-largest Chinese company by market cap that trades on U.S. exchanges.  It has established itself as the dominant player in search in China, a first mover and powerhouse brand in that country. Recently it has come under pressure from domestic rivals including Qihoo 360 and Sohu. Will Baidu's success on its mobile platform be the factor that will allow it to remain dominant and grow even bigger and stronger?

Mobile is a money maker. Consider that Facebook (NASDAQ:FB) began to sell mobile advertisements in 2012, shortly before going public. Revenue for 2012 came in at a shade under $5 billion, with a small fraction of that figure coming from mobile ads. In the fourth quarter of 2014, mobile ad sales alone generated $2.5 billion for Facebook. The stock price at the end of 2012 was around $28, and it rose to nearly $80 by the end of 2014. That's a tremendous return, and successfully figuring out how to monetize mobile was the biggest factor in that growth.

Baidu's success with mobile growth in China will likely continue
Robin Lee, Baidu's chairman and CEO, in  announcing financial results for the quarter ended March 31, was quoted as saying, "Mobile's tremendous momentum continued this quarter, with mobile contributing 50% of total revenue." That figure was up from 42% in the previous quarter and is a great sign for the future of the company.

There are a number of reasons to believe that this growth trend will continue. For one, there were nearly 1.3 billion cell phone subscribers in China as of March. That's a staggering number -- more than four times the entire U.S. population. Not all of those phones are Internet-ready, but things are changing, as people in small towns and villages who would otherwise not have Internet access are now able to get it through their mobile devices. This is a good thing for society, as well as for forward-thinking companies such as Facebook and Baidu that can capitalize on this trend.

The number of Chinese mobile Internet users grew 133.3% year over year in 2008 and 98.5% in 2009. In 2015, the growth number has dropped to 24.7%, but that's still quite impressive. The government estimated that there were around 550 million mobile Internet users, and 650 million Internet users overall, as of December. 

Meanwhile, Internet penetration in China remains at around 46%, compared with 87% in the United States. That means there's still a lot of easy growth ahead for mobile Internet use in China, as penetration levels edge toward those found in Japan, the U.S., and Western Europe.

Short-term sacrifices will be outweighed by long-term mobile gains
There are, however, some short-term negatives to Baidu's aggressive mobile strategy. SG&A expenses for the previous quarter came in at $477 million, which management says is "an increase of 47.2% from the corresponding period in 2014, and a decrease of 16.1% from the previous quarter." The year-over-year jump, management says, is a result of "increased promotional spending for mobile products and services."

A company must make short-term spending sacrifices to evolve and grow into the best company it can be. Baidu knows that, and that's why, even though the stock took a hit after the latest earnings release, management is focusing on the business and not the stock price. A long-term investor who was able to see the forest beyond the trees would have recognized this as a potentially good entry point for a position. The stock has since rebounded to over $200 per share, but if management can continue to grow mobile use the way it has over the past few years, I see this as a market-beating stock.

For the long-term Foolish investor, I recommend you pick up a few shares to get some skin in the game, learn more about the company, and hang on for what will be a bumpy but ultimately fruitful ride.

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