Why Baidu's Shares Stumbled

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Chinese search engine Baidu (NAS: BIDU) fell as much as 10% in intraday trading, before recovering to a 6% loss for the day. Several factors contributed to the drop, including an analyst downgrade, and potential legal action against online rival Qihoo 360 (NAS: QIHU) .

So what: Baidu has been China's dominant search engine, but today's downgrade came on the heels of revelations that the company might take legal recourse against Qihoo for its newly-designed search engine. The smaller Qihoo is known primarily for its Internet security products, but had an agreement with Google (NAS: GOOG) to use a modified version of its search engine. Today's legal rumblings led Deutsche Bank to downgrade Baidu to Hold, although Citigroup's analysts maintained their long-term Buy rating on Baidu earlier in the day.

Now what: Competitive threats are always a danger for Internet companies, but both Baidu and Deutsche Bank may be overestimating Qihoo's ability to develop a truly viable alternative. Google's faced billion-dollar threats for years, and yet has kept a chokehold on global English-language searches. This situation is certainly worth keeping a close eye on, but investors shouldn't expect Qihoo to suddenly trounce a very well-established Chinese search engine without substantial effort and significant market dissatisfaction with the incumbent.

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The article Why Baidu's Shares Stumbled originally appeared on Fool.com.

Fool contributorAlex Planesholds no financial position in any company mentioned here. Add him onGoogle+or follow him on Twitter@TMFBigglesfor more news and insights.The Motley Fool owns shares of Baidu.com and Google.Motley Fool newsletter serviceshave recommended buying shares of Baidu.com and Google. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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