Thursday, April 28, 2011

Baidu Keeps Rolling

By Eric Jackson
RealMoney Contributor

4/28/2011 12:15 PM EDT
Click here for more stories by Eric Jackson

Last night's report from Baidu (BIDU - commentary - Trade Now) didn't disappoint the bulls. The company beat earnings expectations by $0.03 a share and beat top-line revenue estimates.

More important, Baidu raised its guidance for the second quarter above $500 million, on the high end of the range. This was beyond any prior high-end estimates for the second quarter. Quite simply, Baidu is continuing to perform with continued staggering growth.

The company's trailing 12 months of revenue prior to last night was $1 billion. Last night's quarter annualized is up to over $1.3 billion in revenue. Next quarter's guidance puts it up to $2 billion annualized. Its last quarter-on-quarter earnings growth compared with the prior year is 171%. That compares to the "mature" growth of Apple (AAPL - commentary - Trade Now) at 95% and Google (GOOG - commentary -Trade Now) of 20%.

But Baidu is still relatively small compared with Google. We're talking $1 billion or so in revenue a year vs. $30 billion. Can Baidu continue to justify a high multiple in the coming years? It now has almost one-third the market capitalization of Google.

To hear Robin Li, the founder and CEO of Baidu, talking about it on last night's call, Baidu still has a lot of growth areas ahead of it, including:

  • Further penetration within China, where only 30% of its population is connected to the Internet today.
  • Further increase in wealth and ad rates within China as the standard of living increases.
  • Growth in mobile use. Last night, Baidu management confirmed that 80% of the Android handsets shipping in China have Baidu as the default search engine. Ironically, Google's open platform has allowed handset manufacturers to insist that Baidu be the default search engine, as it is preferred in China.
  • Social. Robin Li made the point last night that Baidu has been competing against social platforms in China for many years, via Tencent's QQ service. Therefore, it has responded by trying to integrate social search into its search for a while. No one confuses Baidu with a social platform yet, although it has had its own version of Yahoo! (YHOO - commentary - Trade Now) Answers for years, and it has become very popular. Baidu can do a lot more to monetize search. And although the company didn't mention it all last night, there is the possibility of partnering with Facebook to bring the universal social service to China in the future.
  • Local. Today, this remains very under-monetized, according to Li's comments last night. In an increasingly mobile connected world, this search ability will become more important. A couple of days ago, the CEO of Sina (SINA - commentary - Trade Now), Charles Chao, said that over half of the users of his popular Weibo service connect via a mobile device.
  • Video. Baidu has 150 users for its Qiyi video service in less than a year. Youku (YOKU) has 230 million users. Baidu is rumored to be looking to spin-off Qiyi in 2012.
  • Robin Li discussed last night how apps are becoming more popular. Today, there are tens of thousands of apps, and the Chinese are showing a lot of interest in downloading them and experimenting with them. In a few years, however, he said, there will be hundreds of thousands and then millions of apps. At some point, users get overwhelmed with the choices. When that happens, they need to fall back to their familiar choices. Search, and Baidu, will be a key necessity for them. (Other big Chinese Internet companies such as Tencent, Taobao and Sina should also benefit from this trend.)

This morning, there are some increased price targets out from analysts. The stock is up.

Baidu is a solid Chinese company. It might not grow 143% in the next 12 months as it has in the last 12 months, but it will do very well.

At the time of publication, Jackson had long positions in BIDU, SINA, YHOO and AAPL.and short YOKU

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