The company makes money by selling advertising space to businesses and websites. The process is the same as with google: an advertiser bids for a certain keyword or ad space, and when a user searches for it, it gets displayed either at the top of the results or on a website the user visits. In addition to search, Baidu offers a range of other online products including: social-networking, UGC-based knowledge products, location-based products and services, entertainment, security products, mobile related products and services and specialized products and services for developers and webmasters.
China has in internet population of 600 million, and mobile internet population of 500 million. But with less then half the country connected, the penetration is far below developed countries. Baidu's video site Iqiyi already became number one, overtaking it's major rival Youku. The company also owns Qunar (QUNR) a major travel website and Nuomi, an online marketplace for entertainment, dining and health products. They also bought one of China's largest mobile game and app distribution companies, 91 Wireless.
Let's take a look at BIDU's financials:
However, in the first quarter of 2014, Baidu grew revenues by 60% and profits by 24%, easily beating analyst estimates. CEO has warned before, that profit growth will slow down this year due to their sales efforts, which include paying handset makers to pre-install Baidu software on their devices. This will pay off enormously in the long run and Baidu knows that.
BIDU is trading at a forward P/E of 25, Price/Sales of 11.7 and P/B of 10.3. I have done a three stage DCF valuation with the following assumptions:
- forward net profit of 2.5 billion USD in 2015
- growth of 15% for the next 10 years
- terminal growth of 3% thereafter