According to Barclays Equity Research, Chinese search engine firm Baidu is currently firing on all cylinders including branching out into the much more lucrative ecommerce sector.
In an August 11th report on Baidu, Barclays analyst Lisa Yap and colleagues explain their bullish thesis on the company: “We are OW as we see the valuation of Baidu’s highly profitable search business as attractive and we also believe in management’s drive and determination to capture the local ecommerce opportunity that is many times larger than pure search advertising.”
Search business margins remain strong
Yap et al. recently hosted a pair of meetings with Baidu’s CFO Jennifer Li and Investor Relation Director Sharon Ng in California. They report that Baidu sounds confident and emphasize that the core search business is still quite strong. The PC search sector is more mature, but there is still a good bit work to be done to continue improving mobile search.
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Also of note, the mobile sector has not been negatively impacted by any macro weakness so far. The Barclays team estimates that the core search business is valued at $213/share, based on 15X estimated 2016 estimated core search profit.
Building the next Baidu
The Barclays analysts also highlight that Baidu is aiming to build the “Next Baidu” by connecting the growing millions of smartphone users to services. Although they got off to a late start being in group buy and “online to offline” market share, management states that Baidu should catch up over the medium term and transform the firm into “a transaction-based model on local ecommerce in addition to its search advertising model.”
In terms of specific developments with its new initiatives, Baidu noted that out of the 400 cities covered by Nuomi groupbuy, Nuomi achieved the No. 1 position in 60 cities based on GMV. Promotional subsidies and launching Membership+ and the stored value card program also drove higher repeat users for merchants.
In the rollout of the takeout delivery service, Baidu took the to position in 20 cities by overall GMV. When broken down into the working age demographic GMV, Baidu takeout delivery services moved into the number one position in 50 cities, according to the execs.
Yap and colleagues argue that Baidu’s efforts to strengthen its overall mobile internet position and improve its monetization “are bearing fruit, and that its aggressive investment is likely to yield more promising growth over time.”