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Stock pick Baidu has lost its long-term competitive edge
05/23/2013 6:02 pm EST
Why? Think of all the problems U.S. Internet search companies such as Google (GOOG) are having as the Internet world migrates from PC-centric to device centric. The growth is in smartphones and tablets, but ads on those devices sell for much less than those on the desktop PC. Companies like Google are searching to find a way to both grow device-based advertising revenue and margins and worried about what relatively faster growth in device-based ads will do to profit margins.
Now take the problems faced by Google in the United States and make them much bigger and much harder to solve for Baidu, China’s biggest search engine.
Baidu is more PC-centric than Google. It doesn’t have anything like Google’s Android operating system to use as a way to gain centrality in the device world. It faces tougher competition than Google does in its domestic market. And it’s ability to track and target mobile advertising to users isn’t as good as Google’s is.
Here are some numbers that illustrate Baidu’s problem.
The company has a 79% share in the PC search market but has a 35% to 53% share (depending on which research you prefer) in the mobile market.
In the fourth quarter of 2012 growth in PC Internet traffic dropped to single digits due to cannibalization by mobile users. A key factor: the number of smartphone users in Chin climbed to 300 million in 2012 fro 80 million in 211.
Mobile ad rates (cost per click) are only 50% of the cost per click for PC ads.
Baidu’s competitors are getting bigger and better. Qihoo (QIHU), maker of China’s most used Web browser, has teamed with Google on an ad system to go with its new open platform search strategy. Tencent Holdings (700.HK), the owner of the WeChat messaging service (194 million accounts), looks to be picking up momentum in advertising on the strength of the precise targeting capabilities of its ad system and its huge user base (There have to be some duplicates among the 700 million accounts that Tencent claims for all its products. But this is still a huge number.) Tmall/Taobao, the business-to-business retail arm of Alibaba, is aiming to take over the #1 slot in person-to-person selling in 2013.
None of this adds up to the kind of long-term competitive advantage I look for in my long-term Jubak Picks 50 portfolio. Which doesn’t mean, of course, that shorter term the stock won’t make moves to the upside. The shares, which traded at $84.51 on May 3, closed at $93.89 on May 23.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Tencent Holdings as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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