Investors had plenty of concerns going into Chinese Internet search giant Baidu’s (NASDAQ:BIDU) second-quarter results, but most of the worry turned out to be unfounded.
Profits surged by 70% to $436 million, or $1.24 a share, with revenues up 60% to $858.8 million. Both numbers beat Street forecasts of $1.12 a share and revenues of $850.78, and BIDU shares surged almost 11% in Tuesday’s trading.
Despite the gap up, Baidu’s stock still is down about 8% for the year, so there might be even more opportunities for gains. Should you buy Baidu? To see, let’s take a look at the pros and cons:
Pros
Search Giant: Baidu controls 78.6% of China’s search market, so it’s the big dog in town. Baidu also uses a paid-click model, which has proven to be extremely scalable and profitable.
Huge Potential: Baidu has 352,000 customers for its advertising business. That might sound big, but consider that there are about 40 million businesses in China. So if anything, Baidu still is in the early phases of the market.
New Categories: Baidu has been using the Google (NASDAQ:GOOG) playbook. That is, the company has been leveraging its search business to move into other market segments like video, mobile apps and music. Baidu even has its own browser.
Cons
China’s Economy: It’s already slowing, and there are fears the economy might suffer a hard landing — a very real possibility should the real estate bubble pop. This would crush Baidu, considering that advertising expenditures often are among the first that companies will cut back.
Competition: It helps that Google left the Chinese market in 2010. However, Baidu does face strong rivals like Alibaba and Tencent (PINK:TCEHY). Microsoft (NASDAQ:MSFT) also is making some inroads in the market.
Mobile: Baidu has been a laggard in the space. It could be tough to dominate mobile search, as the company does not control the operating system. What’s more, just like what’s plaguing social stocks like Facebook (NASDAQ:FB), the shift to mobile likely will lead to lower revenues, at least in the short-run.
Verdict
Baidu has done quite well despite the slowing Chinese economy. It helps that the company has been aggressively expanding its customer base, such as by focusing on small businesses. This could provide a substantial amount of growth. Just as has happened in the U.S., there inevitably will be a long-term shift in advertising to online platforms. And search often is the most effective.
Baidu also continues to invest in research & development as well as strike key acquisitions. These should help make the platform stronger and provide for more growth.
So should you buy Baidu? Yes — for now, the pros outweigh the cons.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
