Baidu Is Beating Back Google, Winning Fans Among Analysts

Aug. 31, 2007 (Investor's Business Daily delivered by Newstex) --

Baidu.com shows no signs of slowing -- or of losing ground to Google.

China's No. 1 Web search service continues to curry the favor of investors who sense another record quarter of profit and sales, bolstered by China's gradual acceptance of the Internet.

The fact that Baidu's BIDU stock has withstood the recent market correction to hover near 200 -- up from 100 in April -- and land atop IBD's (most recent) Top 100 stocks list is a testament to investor belief in the company and its potential, says C. Ming Zhao, an analyst with Susquehanna International Group, an investment bank.

"The Chinese search market is still in a very early stage, but it's growing very fast," he said. "Baidu, with its dominant market share, is getting the most benefit out of a very robust market."

Baidu shares doubled from March 2006 to late April, and they have more than doubled again to now trade above 200.

Baidu, like Google, makes most of its money by selling text-based ads placed near appropriate search results.

Google GOOG reigns as the top search site worldwide and in the U.S., far ahead of closest rivals Yahoo (NASDAQ:YHOO) YHOO and Microsoft (NASDAQ:MSFT) MSFT.

But China is a different story, says James Lee, an analyst for WR Hambrecht & Co.

"In Baidu, you're talking about a company with a 60% market share vs. a 20% share for Google, which is No. 2," Lee said. "That is quite a sizeable lead."

In the first quarter, Baidu captured 57% of all search ad revenue in the region vs. 18.7% for Google, says research firm eMarketer.

Mountain View, Calif.'s Google is still trying to gain an audience in China, a common problem for outsiders, says eMarketer analyst Ben Macklin.

"Google is suffering from what many Western firms suffer from: not accurately gauging what makes the Chinese Internet user or Internet company tick," said Macklin. "Few firms can simply translate their success from the West into China."

But the U.S. company is accelerating its efforts. On Thursday, the company expanded an agreement with China.com, a leading regional Internet service provider. Google is now providing its search services for China.com's Chinese portal and China search site. In July 2006, Google began providing Web search and ad services to China.com's Chinese and English sites.

Google's efforts should produce results at some point, Macklin says.

"There's little doubt Google, because of its sheer size and expertise, will eventually start to erode Baidu's dominant position," he said.

For the current quarter, analysts polled by Thomson Financial expect Baidu's revenue to more than double vs. the year-earlier quarter to $64.7 million, while per-share profit rises 50% to 62 cents. By revenue, Google is 100 times larger than Baidu. But China, the world's most populous nation, is fast becoming more important to most global companies.

"The opportunity for paid search in China is really endless at this point," Lee said. "We are really at the bottom of the first inning."

Zhao says most businesses in China are just starting to think about tapping into the Internet.

"Baidu had 120,000 active advertisers in the last quarter -- compared with the 20 million small and medium-size businesses that are out there (in China)," Zhao said. "The market is very tiny right now. But more and more advertisers are joining search marketing because they feel that this is an effective way to advertise their businesses."

By 2011, the number of Internet users in China is expected to reach 245.5 million, up from 133.5 million last year, says eMarketer. But that leaves a ton of growth for a country with 1.3 billion people.

And Baidu isn't just waiting around for advertisers and consumers to catch on. It's mulling new services, such as instant messaging, which it hopes brings more users -- and advertisers. In the past year, Baidu has moved into new areas such as music and movie download services and social networking.

Baidu says half of its online traffic last quarter was in services other than search. The company likely will add more services if it means consumers will stay on the site longer, Lee says.

"Services like instant messaging would increase their stickiness," he said. "They don't want to be just a search engine. They want people to stay and traffic the site."

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