Baidu Can't Afford to Mess This Up

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It took some time, but Baidu has finally joined the Wall Street rally of Chinese growth stocks.

China's leading search engine has been meandering since browser and security software specialist Qihoo 360 surprised the market last summer with its rival platform, but the past few weeks have been pretty encouraging.

The shares are up 33% since bottoming out three months ago, and roughly half of that came last week after the company announced a proposed buyout of the country's leading mobile apps marketplace operator.

Tomorrow will be the next major test of Baidu's revival as a market leader.

Analysts see revenue surging 39% to $1.2 billion. However, they also see profitability slipping 2% to $1.21 a share as Baidu invests in growth initiatives that don't carry the same kind of margins as its search stronghold. There's also the fear that Qihoo 360's presence may drive ad rates lower at Baidu if it attracts more sponsors, even though Baidu still commands more than two-thirds of the Chinese search market.

There's a lot of things percolating in the search market below Baidu at the moment.

Global leader Google lost its head in China last week. John Liu -- CEO of Google China -- stepped down last week. His replacement will be Google Europe executive Scott Beaumont. The market may interpret a new helmsman as a reawakening of a sleeping giant, but handing China to the guy watching Google's partnerships business in Europe is really another sign of defeat.

Google's market share in China has slipped as low as 2%.

However, as Google fades even further away in the world's most populous nation, Qihoo 360 is up to 15% of the market, with dreams of growing even bigger.

Reports out of China claim that Qihoo 360 is looking to buy bronze medalist Sogou. The combination of Sogou and Qihoo 360 would gobble up 24% of the market, making it Baidu's largest competitor since the days when Google peaked at a little more than a third of the market four years ago.

There's nothing that Baidu can do about that, and thankfully the market has grown substantially since then in terms of usage and what advertisers are willing to pay. All that Baidu can do now is make sure that it doesn't disappoint tomorrow, but that's a tall order since the Chinese search leader has come up short on the bottom line in the two previous quarters.

Baidu has a lot to prove tomorrow.

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The article Baidu Can't Afford to Mess This Up originally appeared on

Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Baidu, Google, and The Motley Fool owns shares of Baidu and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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