Baidu Shares — 3 Pros, 3 Cons

According to Forbes , Robin Li is the richest person in China, with a net worth
of $5.64 billion.  It was in 1999 that he started Baidu (Nasdaq: BIDU ), which
is essentially the Google (Nasdaq: GOOG ) of China.  The companys market cap is
now about $48 billion. Baidu has certainly been a big friend to its shareholders
the stock has nearly doubled in the past 12 months, while Google has risen
about 6%.  But can Baidu continue its winning ways?  Let's look at the pros
and cons of the company: Pros Search.   This is the most-used Internet
application in China.  And it looks like there continues to be much room for
growth.  Consider that Internet consumption among Chinas population is still
under 35%. At the same time, Baidu continues to improve its market share of the
search market its now about 75.8%. Monetization. Baidu has a highly scalable
business model, i.e., business owners can easily buy and target ads on the
system.  In fact, only a small portion of China's millions of businesses use
paid search marketing. Expansion.   With a massive user base, Baidu is looking
for ways to offer more services.  To this end, the company has been
aggressively investing in research & development.  There also will likely be
more acquisitions.  One big opportunity is mobile.  For the past couple years,
Baidu has been working hard to create new technologies in this category.  For
example, about 80% of China's Android-based phones default to the Baidu search
engine. Cons Competition.   In 2010, Google left the Chinese market.  Despite
this, Baidu still must deal with fierce rivals.  Some of the most threatening
include Alibaba and Tencent.  These companies have large customer bases and are
looking at the lucrative paid search market.  Even Microsoft (Nasdaq: MSFT ) is
a player in the Chinese market. Also, the emergence of social networking
companies, like Renren (Nasdaq: RENN ), could be a factor.  The fact is that
Baidu has been slow to add social features to its platform. Valuation. Baidu's
shares trade at a nose-bleed level of 95 times earnings.  The problem is that
it's going to be extremely tough to maintain its hefty growth rates.  In
other words, there could be a serious correction in the stock if there is even a
small stumble. Pricing.   The ads on Baidu are far from cheap.  While this
helps to boost revenue, it could make it more difficult to increase its user
base. Verdict Baidu is likely to continue to grow at a rapid rate.  Yet the
company faces serious threats perhaps the most important is the competition. 
In other words, there is likely to be more pressure on pricing and margins. 
And of course, the valuation is frothy – which is actually the case for many
of China's high-fliers.  For investors, it will probably get tougher to
expect standout gains.   As a result, the cons outweigh the pros on Baidu. Tom
Taulli's latest book is " All About Short Selling " and his Twitter
account is @ttaulli .  He does not own a position in any of the stocks named
here.