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Can Baidu Inc. (ADR) and Uber Conquer China Together?

By James Sullivan - Sep 23, 2015 at 12:48PM

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Baidu has been built on the back of its online search business, but massive investments into O2O and a partnership with Uber may prove to be its best moves yet.

Source: Uber.

Baidu (NASDAQ: BIDU), while down significantly from its all-time highs, remains one of the most prominent and powerful Chinese companies, with a market capitalization of around $50 billion and huge domestic reach. The company's performance over the past decade is astounding by nearly any metric. Revenue has climbed from 41 million CNY in 2005 to nearly 57 billion over the past 12 months. Net income growth has been equally impressive and has taken the share price along with it. Over the past decade, shareholders have been rewarded with around an 1,100% gain, even after accounting for the near 40% drop from an all-time high reached late last year. 

This kind of success would make many business executives leery of pivoting toward new ventures. Online advertising has made Baidu what it is today and will certainly remain a large part of its future, but CEO Robin Li is making an effort to explore new growth avenues and avoid simply focusing on pure short term profitability at the expense of building the best Baidu for the long term. 

Bigger opportunities elsewhere
Li has already made it a priority to launch online-to-offline investments. These involve food delivery, movie tickets, laundry, and restaurant reservations. According to a recent Bloomberg Business article he argues: "While search advertising is big, the services and retail market is much bigger. The initiative [O2O] will 'definitely' eclipse search revenue over time."

Part of the reason for the stock's tumble has been, according to the CEO, a lack of understanding about how potentially immense this O2O market can become as China continues to get wealthier, more urban, and connected to the Internet. He goes on to note:

We have a better understanding of this market. We think this kind of investment will pay off. So there's a little bit of education needed.

I like when CEOs, especially those with a track record like Li's, lead from the front rather than taking the path of least resistance when it comes to appeasing shareholders.

An Uber-example of one such opportunity
Late last year, Baidu made an undisclosed investment in Uber, an American on-demand taxi service. Uber is a prime example of an O2O business that has proved wildly successful. Users order a car to their location using a smartphone and a driver picks them up in a few minutes and takes them to their destination. Payment is handled automatically through the app. This simple but revolutionary model has allowed Uber to draw investments from a number of prominent companies and individuals on its way to $50 billion-plus private market valuation. 

In September it was announced that Uber raised another $1.2 billion in funding in a round led by Baidu. This is a potentially huge investment in O2O transactions for the Chinese search company. TechCrunch values Uber China at over $8 billion, and I think that it can eventually grow larger than Uber in the United States. Traffic density, a huge population, and severe pollution-related issues all make autonomous cars or ride-share solutions very appealing for China. 

One factor that often trips up Western companies looking to break into China is the lack of a local guide to shepherd them through the process. According to the same TechCrunch article, "Uber is working very closely with Baidu to develop the company's local presence, local staffing and integration with local maps and other services."

One more piece of the Baidu investing puzzle
Baidu has a long growth runway ahead of it with just its core business -- a rapidly growing domestic Internet population, some international expansion, and the secular shift to mobile should all work in the company's favor.

But the O2O market could be the next big thing for the company, and Baidu's investment in Uber underscores their commitment to the space.

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