Can Baidu's CEO Bounce Back?

Can Baidu's CEO Bounce Back?

It's been a rough 12 months for Baidu investors, and the same can be said about CEO Robin Li's reputation.

Forbes is out with its annual list of China's top CEOs. Li topped the list last year. This time around he is falling all the way to 40.


The survey -- ranking CEO performance relative to compensation -- was naturally not going to play well given Baidu's falling share price and narrowing profit margins.

The leading Chinese search engine has seen its stock fall 20% over the past year. Most Chinese growth stocks have moved higher over the past year. This provides a sharp contrast to past years when Baidu marched higher even when Chinese stocks were out of favor.

Qihoo 360 changed the search landscape when it moved to offer an in-house solution last summer. A T.H. Capital report shows Qihoo 360 commanding nearly 15% of the market. Baidu is still the undisputed top dog with 70% of the market, but it feels vulnerable for the first time since Google decided to stage a partial retreat out of the world's most populous nation a couple of years ago.

Baidu has turned to acquisitions and initiatives outside of search to help boost growth, but naturally these areas don't offer the same chunky profit margins that Google and Baidu have enjoyed over the years by specializing in paid search.

Investors are seeing the margin contraction at both Google and Baidu.

Baidu is seen growing its earnings this year by just 4% despite a 36% projected top-line pop. Google's disparity between the top and bottom lines isn't as severe, but profitability is expected to grow less than half as quickly as revenue at Big G this year.

However, Google hit a new all-time high in May. Baidu, on the other hand, has seen its stock lose 45% of its value since peaking two summers ago.

A big difference is perceived relevance in mobile. As desktop search migrates to smartphones, Google is the global leader with its Android mobile operating system. Baidu is scrambling to catch up.

We also can't dismiss the perceived threat of Qihoo 360. Despite Bing's pesky presence, no one fears that Google is vulnerable. It's a different story in China, where Qihoo 360's market shares continues to inch higher with every passing third-party assessment.

Bears sense the weakness. The number of shares of Baidu sold short have nearly tripled over the past year.

However, this is also an opportunity for both Baidu longs and Li's standing among CEOs.

For starters, analysts do see Baidu bouncing back on the bottom line next year. They see earnings per share climbing 27% on a 29% ascent in revenue. Baidu's once lofty trailing P/E ratios are now in the high teens.

Li is unlikely to reclaim the top spot for the 2014 list, but there should be ample opportunities for him to claw his way higher in the year ahead.

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