Baidu (BIDU): China's Search Engine Has Clay Feet

Baidu (NASDAQ:BIDU), China’s No.1 search engine based on market share, had the same problem Google (NASDAQ:GOOG) does. Its revenue is not growing as fast as it was last year. The critical difference is that Internet use and the size of the Chinese population should be driving rapid improvements in Baidu’s sales, and they are not.

Baidu revenue in the third quarter of 2009 was $187.3 million, a 39.1% increase from the corresponding period in 2008. Net income in the third quarter of 2009 was $72.2 million, a 41.7% increase from the same period a year ago.

Going forward, the picture as not as good.

Baidu expects moderate year-over-year growth for the fourth quarter of 2009 due to the temporary negative impact anticipated when the Online Marketing Classic Edition, one of its key advertising sales initiatives, is discontinued. Due to that, Baidu currently expects to generate total revenues in an amount ranging from $174 million $180 million for the fourth quarter of 2009, representing 32% to 36% year-over-year growth. Those figures are remarkably weak given that the last quarter of the year is usually the best in terms of sales.

Google is doing everything it can to pick up market share on Baidu. The American search engine faces the daily humiliation of being well behind the Chinese company in terms of its market share in the world’s most populous nation. Google has repeated shown that it will exploit even the smallest weakness in a competitor.

Baidu, with its stock now near at 52-week high of $433 and with a market cap of $15 billion, had better regain its footing or be run over.

Douglas A. McIntyre