With Bond Deal Adding To War Chest Baidu Should Focus On Mobile

Baidu (NASDAQ:BIDU) announced, on November 20th, that it raising $1.5 billion in a bond offering to maintain a ‘war chest’ which will help tackle the increasing competition that it is facing in the Chinese market. ^[1] We think that Baidu’s management has the right idea, especially since the cash will be used primarily for M&A, which is a good way to expand the company’s user base and move into different markets to diversify its revenue streams. Specifically, we think that Baidu should use the cash raised to focus on the mobile space as it will the primary driver of revenue going forward. 

See our analysis of Baidu here

Competition Causing Worries

Baidu raised the $1.5 billion via bonds primarily to enhance its ability to battle with competitors such as Qihoo, which launched a competing search engine in August. Overall, we think that the company is rightly focusing on protecting its turf, and prepping for what could be a long war for market share in China. It is also looking to protect search revenues, which made up 63% of total revenues in 2011, and are key for the company’s financial health.

Over the long term, we think that Baidu will need to invest heavily in new product lines or buy out companies with exciting products. Initiatives like the firm’s new cloud computing center, which will help the company diversify into the cloud business, need huge capital investments up front. Going forward, we think that we will likely see a Baidu which, like Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL), keeps lots of cash on hand to capitalize on any new opportunities in the market.

Mobile the Focus

Baidu has done well when it comes to driving mobile user growth but has yet to have much success when it comes to monetizing the mobile user base. Additionally, Baidu has struggled to capture the same market share in mobile that it has on PC’s. It had 35% market share in mobile earlier in the year, compared with 70% for PC’s. ^[2]

Overall, the company has a huge opportunity on the mobile front, and we agree with having  cash on hand as the mobile industry will have intense competition going forward. At present, only around 40% of China’s population accesses the internet over their mobile phones, and if Baidu can buy out well positioned start-ups in the mobile industry, it could generate user growth as mobile internet penetration increases.  ^[3]

Baidu’s mobile traffic grew 100% year-over-year in the third quarter, and we expect it to maintain a very high growth rate over the next year or so. The fact that mobile internet penetration is only at 40% leaves around 600 million potential new users going forward.

We currently have a $125 price estimate for Baidu, which is approximately 30% above the current market price.

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1. Baidu Announces Pricing of US$1,500,000,000 Notes Offering, Baidu Investor Relations [↩]
2. Baidu’s Mobile Push: Not As Easy As It Seems, Seeking Alpha [↩]
3. China passes 1 billion mobile subscribers, passes 400 million mobile Web users and overtakes US as world’s top smartphone market, mobiThinking [↩]