Update Baidu (BIDU)

Shares of Chinese search engine company Baidu (BIDU) are off 3.6%, or $5.13 a share, as of 3 p.m. today, after the company reported truly terrible fourth quarter results after the close of the New York markets yesterday, February 16. Earnings of 95 cents a share were five cents a share above the Wall Street consensus. (Baidu is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ .

Revenue grew by just 82.6% from the fourth quarter of 2010 as the company saw a 13% increase in its base of active advertisers to 311,000 and a 62% increase in the average ad spend per customer.

The company also managed–deplorably—to keep a tight lid on costs with the costs of acquiring traffic flat with the fourth quarter of 2010. The cost of traffic acquisition remained below historical levels as Baidu’s careful screening of traffic from its partner sites cut down on traffic “waste.” The company did increase spending on research and development for mobile search—mobile searches now account for 15% of all searches on Baidu, the company says—and on its content verticals in online video and online travel services. With investments in bandwidth to support higher traffic, the company actually saw operating margins collapse by 0.6 percentage points to 51.4%.

Okay, let me take my tongue out of my cheek. It was a great quarter and the selling today is really nothing more than profit taking. Read more

Tablet wars ahead in 2012–but it will be Google versus Amazon with Apple on the sidelines counting its profits

Some analysts and investors who read Apple’s (AAPL) December quarter earnings report yesterday are now anticipating the big fight in the tablet market between Apple’s iPad and Amazon.com’s (AMZN) Kindle Fire.

But there’s an increasing wave of opinion that argues these investors are looking at the wrong war. (For my take on Apple’s earnings see my post http://jubakpicks.com/2012/01/25/apple-is-still-a-cheap-stock/ )

Oh, there’s going to be a battle, no doubt about it, but the first combat, this view says, will be between Amazon and Google (GOOG). I know that Amazon’s Kindle runs Google’s Android operating system and that it’s therefore logical to think of the two companies as allies.

It was certainly intended to work out that way, but Google isn’t getting nearly the share of the tablet market for its apps that it thought it would from Amazon. And with other tablet hardware companies set to follow on Amazon’s model, it looks like Google will have to launch its own Android-based tablet or get less of this fast-growing market than it wants.

Here’s the problem from Google’s point of view. Read more

What’s this? An Internet company reports massive growth—and says costs are under control.

It’s even more impressive when these results come from a Chinese Internet company since the sector isn’t exactly known for tight controls on expenses.

On October 28 Baidu (BIDU), the run-away leader in China’s search market, reported earnings of 86 cents a share, beating the Wall Street consensus projection by 3 cents a share. Operating profit in the quarter climbed to $349 million, an 88% increase from the third quarter of 2010. Revenue climbed to $654.7 million, an 85% jump from the third quarter of 2010 and well above the Wall Street consensus of $623 million. (Baidu has been a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ since January 2011.)

The number of companies advertising on Baidu climbed in the quarter and so did their average spending. The number of active advertisers rose by 112% as the company added 6,000 new advertisers to its existing base of 304,000. Average revenue per advertising customer climbed 66%.

Costs were, for the most part, under control. Selling, general and administrative expenses did climb by 55% to $72 million in the quarter as the company beefed up marketing of new services such as its recently acquired Qunar online travel site and its Qiyi online video service, and added new features such as a personalized home page for users. But the all important (for an Internet search company) traffic acquisition cost fell to 8% of total revenue from 8.9% in the third quarter of 2010. Bandwidth cost rose modestly to 4% of total revenue from 3.8% in the third quarter of 2010.

Baidu substantially raised its guidance for the fourth quarter to revenue of $695 million to $711 million (compared to the $649 million Wall Street consensus.) That would represent a 79% to 85% year-to-year increase in revenue.

Baidu’s share price has swung through a wide range in the last year from a 52-week high of $165.96 to a 52-week low of $94.33. On these results and the fourth quarter guidance, I expect Baidu to challenge the top of that range within the next two quarters (especially because China’s stock market in general looks like it’s throwing off its malaise.) For the last year, it’s been an extremely profitable trade to buy whenever the stock nears $120 and hold for gains above $145. I think this time around, holding as the stock runs above today’s price of $141and change toward that 52-week high is warranted. If you’re a long-term investor in Baidu, my suggestion is to add positions near the bottom of the range and to hold through the volatility.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Baidu as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

The drop in shares of Tencent demonstrates the costs of rising competition among China’s Internet leaders

Just because bad news is expected doesn’t mean it won’t hit a stock’s price hard.

Shares of Tencent Holdings (700.HK in Hong Kong and TCEHY in New York), China’s biggest Internet company by revenue, fell to a seven–month low on August 11 after announcing on August 10 second quarter financial results that missed analyst projections. After rallying briefly, the stock has resumed its decline.

Everybody should have known this was coming. China’s Internet biggest companies from Baidu (BIDU) to Tencent to Sina (SINA) are seeing costs rise as they invest in new services that will enable them to turn their huge user bases into more revenue. For example, on August 17, Sina, the owner of China’s third-most visited website, announced second quarter results that missed projection on the rising cost of adding features such as virtual currency and games t its Weibo micro blogging service as competition with a rival product from Tencent Holdings gets more intense. Sina said that costs for Weibo may climb to $100 million in 2011.

In the second quarter, no surprise, Tencent Holding reported increased spending on its micro blogging service and e-commerce website. The company reported that net income grew by 22% last quarter to 2.35 billion yuan ($366 million) from 1.92 billion yuan in the second quarter of 2010. Analysts had been expecting net income of 2.58 billion yuan for the quarter.

The problem clearly wasn’t on the revenue side. Revenue climbed 44% to 6.74 billion yuan from 4.67 billion yuan in the second quarter of 2010.

But general and administration expenses more than doubled to 1.36 billion yuan, up from 666 million yuan in the second quarter of 2010. Selling and market expenses rose 60% to 369.5 million yuan.

For the winners in this market all this spending will create profit machine as big companies with lots of user grow bigger as users are drawn to the size of the user base and the depth of services offered by the company. Tencent claims that it added 27.6 million active user accounts for its QQ instant-messaging service in the quarter to bring the total to 702 million. Investors need to take these numbers with a dash of soy sauce since Tencent’s total-account-figure exceeds the official total for all Internet users in China. But even a 50% haircut (a reasonable discount to my mind) still adds up to a lot of eyeballs that will add their yuan to the Tencent till down the road.

You can already see that in the growth of revenue from areas recently targeted for investment. Sales of Internet value-added services (which includes online games and QQ-related subscription fees) rose to 5.39 billion yuan from 358 billion yuan in the second quarter of 2010. Online advertising sales grew by 29% year-to-year.

Don’t buy shares of Tencent or Baidu if you’re looking for a quick killing. The negative sentiment about growth in investments and costs is likely to continue for a while before the market starts to focus on the income that this investment is bringing in. Use this period, two or three quarters I’d say, to build positions in the companies that you see as winners in this contest.

Tencent Holdings is now selling at a price more than 20% below its 52-week high.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Tencent Holdings as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

This deal quite probably wouldn’t pass regulatory scrutiny in the United States. Good thing, then, that it’s being done in China.

Baidu (BIDU), China’s leading Internet search company, is making a $306 million investment in Qunar, the leading Internet travel search engine. The deal, set to close in the third quarter, will make Baidu the majority shareholder in Qunar.

(Back in the United States, three state attorney generals have begun antitrust investigations into Google’s dominance of online search. Google’s share of the U.S. search market dipped ever so slightly to 64% in May. Google’s share of the online search market in China fell to 19.2% in the first quarter from 19.6% in the fourth quarter of 2010, as the company’s refusal to self-censor its content continued to erode traffic. Baidu’s market share climbed to 75.8% from 75.5%, according to Analysys International.)

Baidu’s investment in Qunar (Which means, the company says, ‘Where do you want to go?” in Chinese) is part of Baidu’s effort to monetize its huge share of China’s Internet search traffic by adding more revenue-generating activities. Read more