Baidu Q4 14A – Mobility pains

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Baidu pays the price for its mobile ambitions.

• Baidu reported disappointing Q4 14A results the cost of building out mobile hurt the figures.
• Q4 14A revenues / net profit were CNY14.1bn (US$2.23bn) / CNY3.23bn (US$517m) which missed estimates of CNY14.1bn / CNY3.52bn.
• Mobile is causing Baidu two main problems.
  • First: Like Google, Baidu suffers from a revenue shift to mobile because mobile advertisements still carry lower prices than those on fixed devices.
  • This is because the click through rates are lower and users are still less inclined to effect a transaction on a mobile device than they are on a computer.
  • I continue to believe that this will change with time and in the long run mobile should actually end up being more valuable than fixed.
  • This is because advertisements on mobile can be more relevant and more contextual to the user making them less intrusive and likely to be of greater interest.
  • This will take time but I think both Baidu and Google are likely to benefit long term as mobile matures.
  • Yahoo! should benefit too if it can execute on its mobile vision.
  • Second: Baidu is investing heavily in developing its own ecosystem of Digital Life services.
  • Baidu’s coverage of Digital Life remains pretty weak and a lot of investment is needed to get a full suite of services up and running.
  • There is no sign of these investments abating and 2015E is likely to suffer because of it.
• The fact that Q4 14A traffic acquisition costs (TAC) increased to 13.5% of revenues from 12.9% in Q3 14A also did not help matters.
• Guidance for the coming quarter was also a bit soft as the late timing of Chinese New Year and a continued shift towards mobile will keep a lid on growth.
• Q1 15E revenues are expected at CNY12.645bn – CNY13.065bn which represents growth of over 30% YoY but is meaningfully below consensus estimates of CNY13.5bn.
• These results highlight that it is going to be only the biggest and the strongest that make it in the Chinese market.
• With smartphone users flattening out at around 900m, RFM estimates that there is enough space in the market for three large players.
• This is where Xiaomi is at a disadvantage. It has plenty of revenues but lacks the profitability of Baidu, Tencent or Alibaba meaning that it does not have the resources to invest as heavily as its competitors.
• Consequently, I fear that it will be left behind in the race to become an ecosystem in China unless it can do something very innovative and maintain its grip on the users’ imagination.
• I continue to see Baidu, Tencent and Alibaba as the big three ecosystems in China.