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Baidu (BIDU) will report Q3 results on October 29th.

The Street expects:

  • Revenue: $998 million
  • EPS: $1.28 per share
  • Q4 revenue guide: $1.03 billion

Heading into the earnings, investors should focus on:

  1. Competitive pressure from Qihoo (QIHU)
  2. Additional color on mobile monetization

In mid-August, Qihoo began to leverage its 61% browser penetration rate to enter the search market and compete against incumbents such as Baidu, Tencent (OTCPK:TCEHY), Sohu (SOHU) and Google (GOOG). Since then, Qihoo's traffic market share in search has stabilized at a 10% level, while Baidu's traffic market share declined from ~86% to 81%. While Qihoo is unlikely to dethrone Baidu in the near-term, the company's threat is real and could further erode Baidu's market share in the future, given its 272 million browser user base.

In my view, Baidu should focus on improving user experience in order to fend off Qihoo. If history is any guidance, Google faced a similar situation back in mid-2009 when Microsoft (MSFT) launched its new search engine, "Bing". However, Bing never posed a serious threat to Google because Google commanded a stronger user experience than its peers and Bing could only grow at the cost of other players such as Yahoo (YHOO) and AOL (AOL).

Baidu already has a technological edge over Qihoo with its 6,500+ engineers who focus on search-related products. Now Baidu needs to continue enhancing its user experience so that it can persuade Qihoo browser users to set Baidu as their default search engine and diminish Qihoo's potential in the search market.

In addition to the competition from Qihoo, investors also need to look for additional color on mobile monetization. According to management, mobile accounts for 20% of Baidu's traffic as of 2Q12. However, mobile revenue is insignificant at this stage, possibly presenting only 2-3% of total revenue. Baidu has a lineup of mobile monetization methods including cloud computing, mobile OS, apps, and pay-for-call. Aside from the mobile OS that has yet to gain any meaningful traction, there is little information on the other products. Therefore, additional color on mobile monetization would be helpful to investors.

Finally, the recent downgrade by Credit Suisse on Baidu from "Neutral" to "Underperform" on October 9th presents investors with a buying opportunity because the key issues brought up by the Credit Suisse analyst (eg. overly optimistic Street estimates, intensifying competition from Qihoo, higher TAC going forward, and lower margin due to increased R&D spending) were similar to the ones that Raymond James and Jefferies brought up when their analysts first downgraded Baidu. I believe that all the negative news/concerns are already reflected in the stock price and find Baidu's current valuation (18x 2013 consensus EPS estimate) is quite attractive for investors.

Source: Baidu Q3 Earnings Preview: Emerging Competition And Mobile In Focus