Baidu (NASDAQ:BIDU) has grown to become a $70 billion company (by market cap) and one of the most visited websites in the world, largely on the back of being excellent in one business in one geographic region. It is the dominant search engine in China, which has the largest base of Internet users in the world. Recently, the company has been making efforts to diversify its offerings, both geographically and with regard to products. It has made small investments in Brazil and maintains a minuscule presence in the United States, Canada, and Western Europe, which are dominated by Alphabet's Google. Let's look at what the new product offerings are and why India is ripe to be the next huge market for Baidu.
Going all in on online-to-offline services
Baidu CEO Robin Li has made the decision to temporarily forgo maximizing profits in an effort to diversify the business and address what may be a much larger overall market. Profits from online ad sales are being heavily reinvested back into new ventures. This approach affects the bottom line and is at least partially responsible for the swoon we've seen in Baidu stock over the past year or so.
Baidu is making a push into online to offline, or O2O, which involves transactions that begin online and are completed in the real world. This process includes ordering clothes online and picking them up in a bricks-and-mortar store, ordering delivery from a restaurant on your smartphone, or buying movie tickets on a site such as Fandango. In Baidu's Q2 2015 earnings call, Li says, "O2O opens our total addressable market in China by a factor of more than 10."
Why is India so exciting?
While Baidu is still in the early innings of its move to O2O in China, it reportedly has been in talks to make a relatively small investment in an Indian O2O leader. Mydala is India's largest coupon and discounting company, and rumor has it Baidu is looking to acquire a majority stake for around $100 million. Doing so would give Baidu an entree into the Indian market, which is poised to overtake China in population size sooner than was previously expected.
Population is only a small part of the equation for Baidu. What's even more exciting from my perspective are the metrics about Internet usage. Much of the growth thesis for Baidu in China centers on the fact that China has about 50% overall Internet penetration as a percentage of population. This number stands in contrast to the nearly 90% levels found in the United States, Japan, the United Kingdom, and South Korea. As the gap between these levels closes, it will mean there are hundreds of millions of more potential O2O customers.
India, with a population nearly that of China's, has an Internet penetration level below 30%. So for all of the excitement about seeing China reach 80%-90% levels in the future, India is perhaps on an even more explosive growth curve. Increased Internet adoption along with a still rapidly growing population could potentially create over a billion new Internet users in India over the coming decades. This is not a short-term investment for the faint of heart, but the upside potential is enormous.
Only works for the long term
I've been closely following Baidu for a while now, and the more I see the pieces of Li's plan coming together, the more I begin to view this as a truly Foolish (with a capital "F") investment. Baidu has been one of the great stocks to own over the past decade, and this past performance can often scare away new investors.
In the case of Baidu, that approach would be a mistake. An investment in this company today is less about seeing the legacy online search business expand into other countries (although it will continue to grow in China) and more about O2O. Investment in O2O requires massive amounts of capital, relationship building with merchants and vendors, and a long time horizon. Li's willingness to forgo near-term profits to build a much bigger, better company a decade from now is what I look for in a CEO. I'm excited to watch this story unfold, and I recommend taking a deeper look at this best-of-breed Chinese success story.