In order to meet this onslaught into the wireless world, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has been spending heavily to improve the mobile search experience as well as to add technologies for mobile travel reservations and purchase a mobile app store and mobile video platform. All of these moves could make the company into a mobile powerhouse in China, yet the stock market has been focused on the higher expenses, causing earnings expectations to wilt for 2013.
Mobile apps platform
Baidu.com, Inc. (ADR) (NASDAQ:BIDU) recently announced a deal to purchase mobile apps platform 91 Wireless for $1.9 billion. The deal helped push the stock to recent highs while causing NetDragon to collapse in Hong Kong trading. The deal involved paying $1.09 billion to NetDragon for a 57% stake and $800 million to the remaining 43% holders.
According to reports, 91 Wireless only holds a 15.6% market share of the mobile apps business in China with Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s Mobile Assistant controlling 27.4%. Combined, the two platforms only control 43% of the market, providing the ability for a leader to consolidate it in the next couple of years. The details suggest that NetDragon’s mobile revenue rose more than 200% in Q1 to reach $23.5 million. At a run rate of nearly $100 million, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) paid a significant price for the app platforms future growth.
Video deals
The company recently purchased PPStream for $370 million to become a leader in the online video market, one that is quickly turning towards mobile. It will merge this business with the existing video platform iQiyi. According to the company, the combined entity will become China’s largest online video platform by number of mobile users and video viewing time.
This entity will compete against Youku Tudou Inc (ADR) (NYSE:YOKU) for dominance in the online video sector. That company claims to be the leading Internet television company in China. For Q1, Youku Tudou Inc (ADR) (NYSE:YOKU) had 100 million active monthly users on mobile with over 170 million daily video views. Total revenues were only $83 million, providing an example of how a corresponding division at Baidu.com, Inc. (ADR) (NASDAQ:BIDU) would only equate to less than 10% of the $1.2 billion expected for Q2.
Valuation comparison
The purchase of a mobile app platform is curious considering the press by Qihoo 360 Technology Co Ltd (NYSE:QIHU) to push into the online search market. As the leader in mobile apps, those two companies will go head-to-head in several key mobile markets.
Qihoo 360 Technology Co Ltd (NYSE:QIHU) has seen its stock surge this last 12 months, going from $15 to nearly $60 now. It now trades at a lofty 35 times 2014 earnings estimates. With the market cap now reaching $7 billion, the stock trades at 12 times revenue estimates for this year.
Baidu.com, Inc. (ADR) (NASDAQ:BIDU) only trades at 17 times forward earnings estimates after numbers have collapsed in 2013. With revenue still surging, the declines in earnings expectations have mainly come from decisions to push ahead with hiring more software developers for the push into mobile.
Youku Tudou Inc (ADR) (NYSE:YOKU) is still struggling to be profitable, so Baidu definitely has the ability to squeeze it for margins. Having the cash hoard and cash flows sure will help Baidu compete in this sector.
Bottom line
The mobile Internet market is China has already become very competitive. Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is using its cash hoard of over $3 billion to quickly rise in the ranks of online video and mobile apps. Several developments that could help push more mobile searches back to the company. While investors missed the golden opportunity to purchase the stock back around $85 a few months back, the current stock price still offers plenty of room for multi-year gains as the China Internet market still has the potential of adding another 500 million users.
The article Baidu: Creating a Mobile and Video Powerhouse originally appeared on Fool.com and is written by Mark Holder.
Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends Baidu. The Motley Fool owns shares of Baidu. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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