HISTORY OF BAIDU
In 1994, the founder of Baidu Robin Li was working on Down Jones, and he began searching for algorithms which can form search engines. After two years, he developed the RankDex. This algorithm ranked the web pages. Sergey and Larry also started searching and developing same kind algorithms which were to be used by Google. After working for the company Info seeks Robin Ki launched Baidu in 1999 in China. It started off as a paid search engine service. However, after a year, it launched as an independent service. To this date, Baidu has been improving in competing in China with its competitors and has continued dominating the internet marketing and the search engine domains. In 2005, Baidu went public and earned a return of 354% on its first day of trading. It has been initially popular as the Google of China. It is the second largest search engine in the world today. The company has been criticized for the censorship. It has also been criticized for the promotion of the illegal music downloads. The public image has suffered because of its flooding advertisements on the search results with sponsored ads (Baidu).
PRODUCTS OF BAIDU
The product portfolio of the Baidu Inc includes the DU Speed Browser, Facemoji Keyboard, ES File Explorer, MoboMarket, DU Caller, Photo Wonder, and a DU Battery Saver. The company offers different Internet-based services like the search engine service, the web browsing service, the cloud storage service, the online marketing, and advertising service.
Because of its high criticism for the flood of online advertisements which make the use of Baidu difficult for the users, the company is going to introduce the Phoenix Nest for the display of the advertisements as the Google displays. The company has entered into making self-driving cars. Analysts are considering the launch of the Apollo 2.0 the newest version of the self-driving software better and improved. They are even considering it to beat Google by adopting the Android Operating system. Baidu can dominate in this segment in the Chinese market if succeeded. It will translate into a big rise in the share price in the future.
COMPETITORS OF BAIDU
Baidu can be considered as the number one search engine in China with its controlling share of about 76.05 % of the whole Chinese market. The users of the Baidu search engine in China have reached 705 million at the end of 2015. In the Chinese market, Baidu can be considered as invincible. However, in the global market, it is considered the 2nd largest search engine.
The number of users in China, USA, Japan, France, and Germany for Baidu are;
| China | The U.S. | Japan | South Korea | Taiwan | |
| Percentage of Visitors | 93.2% | 1.2% | 2% | 0.8% | 0.7% |
(Statista.com)
The global market share of the search engine market is captured by;
| Search Engine | Market Share |
| 87% | |
| Bing | 5.82% |
| Yahoo | 2.92% |
| Baidu | 0.86% |
| Ask.com | 0.6% |
| Other | 0.5% |
(Statista.com)
It shows that Baidu is the third global leader in the search engine market. With Bing and Google Inc leading the market. Google has substantially 90% of the market under its control. Google is the largest search engine globally, however, in China, it shuts down their business in 2010.
Market Share of Baidu
The Chinese search engine market, however, depicts a different picture. Baidu enjoys a healthy 63% share of the market of a search engine with 360, Sogou and So-so as competitors. Qihu’s 360 is the local competitor with the 2nd largest search engine in China. It started off as anti-virus software and started its search engine in 2013. Traditional TV, newspaper, billboards, also can be considered a competitor for Baidu for its online advertising market.
Market Share of Baidu in China
FINANCIALS OF BAIDU
The financials of the company Baidu Inc show its strong financial position. The company revenue and operations and net margin have increased in 2017 substantially. The following table for the ten years shows the strong Financials of the company. The Gross Profit of the company has improved as compared to the last year. The company has spent more on the research and development and less on general expenses. The operating income has increased significantly in 2017 as compared to 2016. The company has improved its net income by around 7,000 million in 2017.
| Financial Ratio Analysis | ||||||||||
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |
| Return on Assets % | 9 | 21 | 41 | 39 | 30 | 18 | 15 | 27 | 7 | 8 |
| Return on Equity % | 12 | 27 | 54 | 56 | 51 | 33 | 29 | 51 | 13 | 18 |
| Return on Invested Capital % | 10 | 26 | 52 | 50 | 35 | 21 | 18 | 34 | 8 | 11 |
| Gross Margin % | 71 | 64 | 73 | 73 | 71 | 64 | 62 | 59 | 50 | 49 |
| Operating Margin % | 31 | 34 | 50 | 52 | 50 | 35 | 26 | 18 | 14 | 19 |
| Net Margin % | 36 | 33 | 45 | 46 | 47 | 33 | 27 | 51 | 16 | 22 |
The financial ratios show that Return on Assets has improved by 1% from 7% to 8%. The Return on Equity has increased substantially from 13% to 18% in 2017. The Return on total invested capital has increased by 3%.
Financial Ratios of Baidu: (Finance.yahoo.com)
The operating performance of the company in 2017 has improved as compared to 2016. The Gross Margin percentage seems to lower by 1% however. The operating margin has increased from 14% to 19%, and the company has reported a net income margin of 22% increased from 16% in 2016.
Operating Performance of Baidu
The Earnings per Share is one of the many indicators which are used for the valuation of the firm. It shows how much of its earning the company is earning on its shares. The earnings per share of 2017, show that the company has surpassed the estimations of the analysts for all four quarters.
Baidu Earning per Share
For all four quarters, the actual company earnings per share have been higher than the estimated earnings per share. The following table shows the values of the earnings per share for the four years.
| Earning for last 4 quarters: | |
| Estimated | Actual |
| $0.96 | $1.08 |
| $1.61 | $2.52 |
| $2.14 | $4.09 |
| $2.10 | $2.49 |
(Morningstar.com)
The comparison of the actual and the estimated Earnings per share shows that Baidu Inc has reported higher earnings as compared to the estimations in its third quarter. The second quarter has the second highest reported earnings as compared to the estimated ones. The first quarter has reported the least change in the estimations and the actual earnings per share. It shows that the company has the potential of surpassing the estimations and expectation regarding its performance.
Baidu EPS 2017 Qs Actual Vs Estimated
FUTURE OUTLOOK OF BAIDU
Firm Value of Baidu
The bellow graph shows the stock performance of Baidu Inc. for the last two years. In the last two years, the price of Baidu stock has run on the uptrend line. Investors like to buy the stock when the price falls in this area. The 210 is the roof for the last year, the stock price has crossed the roof price this year and has reached over 210. It shows the potential of investing in Baidu when the price of its stock is above the two mentioned lines.
Baidu Stock Price
For valuation of the company share, we can use the Discounted Cash Flow Method. For this, however, we have to use the CAPM model to estimate the cost of equity for the company Baidu.
For this purpose, we are using the following equation:
Ke = Rf+βx(Rm-Rf)
The S&P 500 Index 52-week return is considered as the market rate of return. The IRX rate for the treasury bills is considered as the risk-free rate of return. The Beta indicates the risk factor the stock of Baidu, which has been taken from the Yahoo Finance. The Money Chimp website is used for the calculation of the Expected share value by using the Discounted Cash Flow Method. The Earnings per Share value is taken from the Morningstar website. The Year-to-Date Earnings per share is taken. The five-year growth rate of the Earnings per share as mentioned in the Morningstar is taken from the earnings per share growth rate for coming five years. The Earnings per share growth rate for the years following these five years are assumed at a lower 5%. The Chinese Yuan to USD exchange rate on the day 6 May 2018 of 0.16 has been used for the conversion of the EPS and computed-DCF-Share value in US Dollars.
| S&P 500 Index | Rm | 12% |
| IRX | Rf | 2.34% |
| Beta | Β | 1.96 |
| Cost of Equity | Ke | 20.77% |
| EPS | Trailing Twelve Months TTM | $ 10.63 |
| EPS Growth Rate | Lst 5YR Gr Rt | 12% |
| EPS Growth Rate | Assumed | 5% |
| Share Price | DCF | $ 101.00 |
| Current Share Price | ($) | $ 263.09 |
| USD to Yuan Rate | 1 Yuan = | 0.16 USD |
(Finance Yahoo)
| Diluted Earnings Per Share | ||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | YTD | TTM | 5-Yr Avg | 5-Yr Growth |
| ¥ 30.02 | ¥ 37.34 | ¥ 95.15 | ¥ 31.86 | ¥ 52.41 | ¥ 18.68 | ¥ 66.46 | ¥ 48.74 | 0.12 |
| $ 4.80 | $ 5.97 | $ 15.22 | $ 5.10 | $ 8.39 | $ 2.99 | $ 10.63 | $ 7.80 | |
(Yahoo Finance)
The glimpse of the workings of the Money Chimp is given in the Appendix. The share value computed by DCF method is found to be $101 as compared to the current value of the stocks of Baidu at $ 251.73.
STOCK RECOMMENDATIONS FOR BAIDU
As per the valuation of the firm Baidu Inc by the DCF method, it is found that the company is overvalued thus as per this model any investment made at this time will not pay off in coming years. The stock recommendation thus would be to hold or sell the stock, as the overall competitor analysis and financial analysis show the potential for a rise in the stock price of the company Baidu Inc.
Work Cited
Baidu. “About Baidu.” Baidu. Baidu, 2018. Web. 6 May 2018. http://ir.baidu.com/phoenix.zhtml?c=188488&p=irol-homeprofile.
Finance Yahoo. “S&P 500 index.” Finance Yahoo. Finance Yahoo, 17 April 2018. Web. 6 May 2018. https://finance.yahoo.com/quote/%5EGSPC?p=^GSPC.
Finance.yahoo.com. “Baidu.” Finance Yahoo. Finance Yahoo, 6 May 2018. Web. 6 May 2018. https://finance.yahoo.com/quote/BIDU/history?ltr=1&guccounter=1.
Morningstar.com. “Baidu.” Morningstar. Morningstar. 6 April 2018. Web.6 May 2018. http://www.morningstar.com/stocks/xnas/bidu/quote.html.
Statista.com. “Worldwide desktop market share of leading search engines from January 2010 to October 2017.” Statista. Statista, 2018. Web. 6 May 2018. https://www.statista.com/statistics/216573/worldwide-market-share-of-search-engines/.
Yahoo Finance. “13 Week Treasury Bill Rate.” Finance Yahoo. Finance Yahoo, 6 May 2018. Web. 6 May 2018. https://finance.yahoo.com/quote/%5EIRX?p=^IRX.
Appendix
Benchmark Return Rates Baidu
Discounted Cash Flows Calculator
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