Baidu Can't Catch a Break


Baidu can't win them all.

Citigroup analyst Muzhi Li is out with a bearish note on China's leading online search provider.

Li's pessimism isn't new. He has a sell rating on the stock and an $80 price target. However, his new cause for alarm is concern that Baidu's traffic acquisition costs will be moving sharply higher.

Baidu recently held its annual Baidu Union Summit, providing encouraging news to webmasters monetizing their websites through the company. Baidu Union -- similar to Google's more prolific AdSense program -- lets publishers serve up relevant ads alongside their content.

According to Li, Baidu's planned payouts to union members would equal to 13.7% of Citi's revenue target for Baidu this year, up sharply from last year's 8.7% cut. Is Baidu being more generous to keep webmasters close? This doesn't seem necessary. Qihoo 360 is just starting to monetize its search engine, so it will be a long time before advertisers are willing to pay up for leads through Qihoo 360's network. Qihoo 360's move for an in-house solution means less action for its ad-serving partner Google, and that weakens another potential Baidu rival.

A more bullish explanation could be that Baidu's fleet of third-party publishers is growing at a faster clip than Baidu's own page views -- hence the spike in traffic acquisition costs as a percentage of overall revenue -- but we'll have to let the year play itself out to see if that's the case.

Li's been bearish on Baidu for some time.

A month ago he was concerned about SINA , fearing that Alibaba purchasing an 18% stake in SINA Weibo might lead to problems for Baidu. SINA could potentially limit access to its real-time searches of Weibo content, just as domestic search giants had to shell out for access to Twitter. It would be a pretty big gamble for the popular micro-blogging platform since Baidu still commands the lion's share of China's search requests.

Li also lowered the stock's price target to $90 back in January, fearing Qihoo 360's feisty arrival. Before that he waxed pessimistic in November, arguing that Baidu was raising money for acquisitions that were meant to distract investors from the faltering fundamentals of online search in China. Mobile is gaining in popularity at the expense of desktop search, but mobile usage isn't as easy to monetize, especially as smartphone users spend more time on apps than searching the Internet.

Some of Li's concerns are more valid than others, but his bearish sentiment has paid off. Baidu is one of the few growing tech giants trading far closer to its 52-week low than its 52-week high.

Baidu has plenty to prove, but generously sharing the wealth with its partners shouldn't require an apology.

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Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Baidu, Google, and SINA. 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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