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Baidu Looking Good for the Long Term

Strengthening forecasts for Baidu are based largely on the fact that China's internet penetration remains low, near 40%, which is roughly half of what is seen in South Korea, Japan and the U.S.

China's plans to boost high-speed internet connectivity will begin to balance-out these numbers and create a supportive framework for online advertising.

The vast majority of Baidu's revenue (upwards of 90%) comes from paid search, but new investment in ad exchange services will allow the company to sell its offerings on external sites.

Strategies like these generate roughly one-third of Google's advertising revenue, and once Baidu starts to gain traction in these areas, profit performance will grow as well.

Overall, this paints a bullish picture for Baidu.

It should be noted that lower profit margins are generated by third-party ad programs, when compared to paid search (as they are diminished by revenue sharing). But once we start to see upswings in Chinese stocks, Baidu is positioned to be one of the top performers.

As a comparative example, Google has been a market leader since stocks hit their lows in 2009, rising nearly 350% in the process. Given its relative position in the market, strong upside in ad spending and margins should be seen for Baidu once China's economy shows signs of stabilizing.

This means the stock is a "buy" at current levels.

Google's limited exposure in the Chinese market opens the door for companies like Baidu to continue to benefit from the changing demographics and growing internet penetration expected in the next five years.

Baidu's services are comprehensive and varied, offering everything from message boards to maps, games and video. Perhaps its greatest potential is in mobile search, which is still largely underutilized and offers massive opportunities for growth.   Given these factors, Baidu stock is trading well below its fair value, which creates excellent opportunities for long-term investors able to absorb the higher volatility that is associated with Chinese stocks.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Cox is a university teacher in international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of websites, including MarketBulls.net, Seeking Alpha, FX Street, and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.
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