Doing some catch-up on this stock. I added Baidu.com (Nasdaq: BIDU) to the Jubak Picks 50 long-term portfolio on January 18, but this is the first time I’ve had an opportunity to explain why in detail or to actually add it to the portfolio. I’ll be working on explaining the other sells and buys announced on January 18 over the next week or so.
It was a great quarter for Baidu, and I certainly like the way the operator of China’s most popular search engine has made hay from Google’s (Nasdaq: GOOG) problems in China. Looking forward, I think growth will continue at the current torrid pace, but margins are likely to fall as Baidu expands into new markets and as competitors try to take market share in search.
For the fourth quarter, announced January 31, Baidu reported that sales increased 94% (to 2.45 billion yuan, or $372 million) from the fourth quarter of 2009. Net income more than doubled to 1.16 billion yuan ($176 million) from 428 million yuan in the fourth quarter of 2009.
For the first quarter of 2011, Baidu projected that revenue would range from 2.38 billion to 2.45 billion. That would essentially be flat with fourth-quarter revenue. But the forecast is an increase from the 2.3- billion-yuan consensus among the analysts who follow the company, and year-to-year growth would climb to 84.5% from the first quarter of 2010. That would be enough to keep the company’s record of accelerating growth intact since year-to-year growth in the first quarter of 2010 was just 59.6% from the first quarter of 2009.
Baidu’s market share in search grew to 75.5% from 73% in the third quarter of 2010. Google’s share dropped to 19.6% from 21.6%, according to Analysys International. Google moved its Chinese search business offshore in 2010 to avoid the Chinese government’s Internet censorship efforts.
The company did see attrition in the number of small clients, which led to a slowdown in the sequential growth of active accounts to just 1.5% from the third quarter. The company said that much of this attrition was a result of the complexity of Baidu’s new Phoenix Nest advertising platform.
2011 looks to be an “interesting” year for Baidu. The company will continue to add customers from Google and will be a major recipient of continued growth in search advertising and online shopping in China.
The online ad market is projected to grow from an estimated $3.7 billion in 2010 to $9.5 billion by 2014.
And the online shopping market is just getting rolling. The number of Chinese consumers who had bought online rose to 33% from 28% in the last six months, but the 33% of Chinese who shop online is still only about half the global average.
It’s the investments to exploit and defend those opportunities that will make a dent in Baidu’s margins in 2011. The company is moving into new businesses, including online video, and is looking to add more social networking services and to increase its market share in e-commerce. Baidu’s effort in social networking will put the company into competition with Tencent Holdings (OTC: TCEHY), China’s largest Internet company. In e-commerce, Baidu will be going up against Alibaba, the leading local e-commerce company, and a raft of new competitors in the space.
Competitors are also looking to grab share in the search space from Baidu. New search efforts such as Soso from Tencent, Sogoiu from Sohu, and Etao from Taobao will likely force Baidu to spend more on acquiring search traffic.
The stock is up 18% since I gave it a thumbs-up “buy” on December 21. If you hold it currently, I’d continue to hold. If you don’t yet own the shares, I’d look for a dip to give you a buying opportunity like that in December. But it’s my belief in the long-term Internet growth trend in China that has made me add BIDU to the long-term Jubak Picks 50 portfolio.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did own shares of Baidu.com as of the end of December. For a full list of the stocks in the fund as of the end of December, see the fund’s portfolio here.
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