When it comes to playing the Internet megatrend in China, Baidu (NASDAQ:BIDU) — which generates much of its revenues from advertising on its search engine — has been a great option for investors, who have seen an average annual return of about 20% in the past five years.
But Baidu has been losing its momentum lately, and in Friday trading it stopped outright after its Q1 earnings report sent shares sputtering. BIDU was off about 8% to around $85 as of this writing, well off its 2011-12 highs in the $150s.
Growth isn’t a huge problem, with its most recent quarterly revenues surging 40% year-0ver-year to $961 million. However, that fell short of the Street’s $969.3 million expectation — as did earnings of 95 cents, which were a YOY improvement of just 8.5%. And that profit miss was the Baidu’s second in a row.
So why the slowdown?
First off, Baidu is starting to feel the pressure from its rivals. Qihoo 360 (NYSE:QIHU) has quickly climbed the ranks of Internet search in China, though the company also competes against names like SINA (NASDAQ:SINA), Sohu.com (NASDAQ:SOHU), Alibaba and Tencent (PINK:TCEHY).
To keep its edge, Baidu has had little choice but to invest heavily in upgrading its network and applications.
At the same time, BIDU has been dealing with the transition to mobile. And just as has been the case in the U.S. with companies like Facebook (NASDAQ:FB) and Zynga (NASDAQ:ZNGA), Baidu isn’t finding the process easy. Some of the issues include the difficulty in developing and getting distribution for mobile apps, as well as lower ad rates than for desktop platforms.
Still, Baidu has some considerable advantages. It’s still the wildly dominant player in China, boasting 80% market share in the country’s search market — and that provides plenty of opportunities for cross-promotion of mobile apps. Baidu’s large cash flows have also been important for funding new innovations, including mobile offerings for search, maps, travel and storage, as well as its own browser.
Since the start of the year, Baidu has increased its number of daily active mobile users by 25% to more than 100 million … so while the transition to mobile might not be smooth, BIDU still is getting the job done. That bodes well for long-term growth.
Adventurous investors might consider using today’s dip as an entry point. Shares are only trading at 12 times 2013 earnings, which seems like a pretty good deal for capitalizing on the strong growth in the Chinese mobile market.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities, and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.