Baidu.com, Inc. (ADR) (BIDU): These Three Charts Explain Why This Giant Is in Trouble

The reason for it all
There are two numbers behind all of these issues. Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is growing the number of its online marketing customers, but revenue per marketing customer has dropped precipitously. Take a look at the chart, and you’ll see that as the number of marketing customers is growing, the revenue per customer is going down just as fast.

This is similar to something Google Inc (NASDAQ:GOOG) was going through in their business last year. Google was seeing significant growth in paid clicks, but a decline in cost per click. Google has managed through this transition, but Baidu is in a different place. The difference is, while Google had to deal with competitors like Microsoft Corporation (NASDAQ:MSFT) and Yahoo! Inc. (NASDAQ:YHOO), the U.S. search market is much more mature. Baidu faces numerous competitors looking to stake their claim in the ever changing Chinese market.

Cheap for a reason
Some would argue that even with these challenges, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is extremely cheap. The stock trades at just over 16 times 2013 earnings, and under 13 times 2014 earnings. Analysts are calling for EPS growth of over 31% in the next few years. However, Baidu is also losing to its competition in another way, the company is spending relatively less on research and development.

In the last year, Baidu has spent between 9% and 11% of revenue on R&D. By comparison, the peer that spent the least on R&D was Google at 13.30%. When it comes to Baidu’s Chinese competitors, Qihoo 360 spent 15.86% of revenue on R&D, and Sohu.com Inc (NASDAQ:SOHU) actually spent 17.51%.

The bottom line is, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has fallen far, but could fall even further. Analysts are calling for 25.5% EPS growth between 2013 and 2014, and given the above charts, this may be too much to expect. I would suggest investors wait until Baidu shows these declines are abating before investing. Trying to catch this falling knife seems like a bad idea.

The article These 3 Charts Explain Why This Giant Is in Trouble originally appeared on Fool.com and is written by Chad Henage.

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