Baidu (BIDU +11.61%), China's largest online search company, with a market cap of nearly $60 billion, has seen its share price fall from a high of almost $250 last November to around $170, including a drop of nearly 14% since Q2 earnings came out on July 27.
I believe Baidu has a bright future as a public company, and the investments that it's making will be beneficial to shareholders in the long run. Here are three questions I'd like to ask CEO Robin Li.
Is it too soon to be focusing on Online to Offline when there are search opportunities in other countries?
Baidu is the dominant company in online search in China but makes up less than 1% of global searches. One possible growth plan would be to expand into other large markets where Google is dominant and to try to chip away at its position. While Baidu is making an effort to expand into countries such as Brazil, this is not where Baidu's profits are to be found.
Consolidating power in China against competitors such as Qihoo in its core search space is more important than venturing out to compete in foreign countries with an unknown end. Furthermore, investments in Online to Offline, or O2O, which involves any transaction where an online interaction or sale leads to a culmination in the offline world -- purchasing a movie ticket and then going to the theater, or shopping for clothes and then picking them up in the store, for example -- might present Baidu's biggest growth opportunity of all.
"O2O is a major strategic focus that will define "The Next Baidu" -- a new stage of growth that will unleash not only the potential of our mobile platforms, but also the energy and enthusiasm of Chinese consumers as they increasingly look to mobile to engage and to transact," Robin Li said in the latest conference call. While only time will tell if these heavy investments pay off for shareholders, there are promising signs of adoption. CFO Jennifer Li on the conference call noted that "movie ticketing, where the online penetration was 10% in 2012 ... now stands at approximately 50%." Restaurant reservations, takeout delivery, and online travel are just a few of the areas where Baidu is investing in in this exciting space.
What is the target for mobile as a percentage of total revenue?
Baidu has done a sensational job of moving from having a negligible mobile presence a few years ago to deriving over 50% of total revenue from mobile use. The shift to mobile is one that I expect to continue as more rural Chinese consumers skip over conventional computers altogether on their way to Internet-equipped smartphones. Mobile use is also the key to success with O2O, which Robin Li argues "opens our total addressable market in China by a factor of more than 10, to a RMB10 trillion [$1.6 trillion] opportunity."
Mobile search monthly active users were up 24% from the same quarter last year, and I expect growth in this area to continue. The O2O opportunities appear to be enormous, but I wonder if Baidu may be weakened in other areas if it becomes too dependent on mobile revenue. While I foresee continued growth in mobile adoption, it is still important for the company to maintain a robust desktop/laptop advertising sales program. It is important to evolve while not forgetting about the bread and butter search business revenue that allowed for that evolution in the first place.
What are the intentions behind the recent buyback authorization?
Baidu's board authorized a $1 billion share-repurchase program, available to be deployed over the next 12 months. A press release says the company plans to draw from its existing cash balance to fund the repurchases. This can be a good thing for the company and its shareholders, but I have a few reservations.
If this buyback was initiated because the board believes that Baidu's stock is undervalued and that it has enough cash to undertake all of its growth initiatives, this can certainly be accretive to remaining shareholders. A billion dollars in share repurchases at current share prices would retire nearly 1.7% of outstanding shares.
If it's merely a token gesture meant to quell fears in China, then the board members are taking their eyes off the ball. Short-term stock-price fluctuations for such a solid company should be of little to no concern for Robin Li and his managers. Executing on O2O, streaming video, and other initiatives will have a far greater impact on the company's stock price than any short-term market froth or crash on the Chinese mainland stock exchanges.
I believe the company has as much cash as it needs for its current growth arc and is beginning to think about how it can best allocate capital outside of reinvesting in its core businesses. If that's the case, it shows that management is more focused on rewarding shareholders than pushing for "moon-shot" investments outside Baidu's core competency.
As a fairly new Baidu shareholder, I've been happy with what I've seen from Robin Li in terms of the company's future direction. Costly investments are being made now that have put a damper on earnings. This doesn't greatly concern me as I think they will pay off in the future.
I'll be keeping an eye on the company in order to get some more clarity regarding the questions asked above but at the moment Baidu's future looks bright.
