The big question is why?
On the surface, Baidu is as strong and as dominant in Chinese search as it always has been. Baidu has over 80% market share in their home market. That's higher than
And we know that China still has a chance to double the number of people online over the next several years.
So what gives?
I think there are two big reasons for the Fall swoon in Baidu's share price.
First, there is
. Qihoo is a much smaller player in search in China compared to Baidu, yet, it's starting from a small base for its growth. Baidu still has a $35 billion market capitalization as a company. Qihoo's market cap is $2.75 billion.
Over the summer, Qihoo and others started to target Baidu. Qihoo CEO, Zhou Hongyi, has made it his goal to break Baidu's search monopoly. Most U.S. investors think of Qihoo as a browser company and therefore not as someone worth the same kind of multiple as Baidu. Yet they have 272 million monthly users. On their last earnings call, Zhou said:"If we can convert a sizable portion of these users to our search products, that will become . . . a very major market player in this area."
Wall Street seems to believe him. In the last three months, Qihoo's shares are up 38% while Baidu's shares are down 24%.
The second reason why Baidu's shares have been under attack is related to the rapid shift from PC users to mobile users. Just as with Google in the United States, the move makes an average search query far less profitable for Baidu compared to the good old desktop days.
How will they deal with this shift? They're doing the best they can, just as Google is. Baidu is trying to make their mobile search product the best on the market. They've also signed agreements with partners like
to provide the search behind Siri queries in China.
Up until now, Google has countered the mobile shift criticism by pointing out that the number of paid clicks they receive has been continuing to go up. Therefore, this is a sign that people are searching even more in a mobile world compared to a desktop only world. That's a good thing for them and they will eventually figure out how to monetize better the new mobile world.
This same logic applies to Baidu. However, Baidu has never seen its stock price slowed down yet by the shift to mobile.
Since the March 9, 2009 bottom, Baidu's shares are up 535% vs. 114% for Google's. And over the last two years, Baidu's shares had stayed above Google's shares until August of this year.
Now, Baidu's getting its day of reckoning on its search monopoly and mobile shift.
It still trades at a premium to Google though. Baidu has a 16.5 forward price-to-earnings ratio compared to Google's at 14.
Could it fall further? It's possible. Chinese high-flying tech stocks like Baidu certainly overshoot on the upside and downside. Recall that Baidu broke below $11 in December 2008 when people were liquidating anything that was high beta.
However, Baidu is still a very strong company with a solid management team. It deserves to trade at a premium to Google because of its smaller size and better growth prospects in China in the next few years relative to Western world that Google sells to.
Therefore, short term, Baidu's drop is probably close to done.
At the time of publication, the author was long AAPL.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.
Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.
He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.
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