Baidu, Inc. is the leader for Chinese language search engines, and was founded in 2000 by Robin Li. With their share of the online search engine market in China falling to about 60%, some worried that smaller rivals such as Qihoo 360 and Sohu would catch up and end Baidu’s dominance of the market. These fears appear to be unfounded, however, as Baidu has maintained their dominance in online ad revenue even as their market share decreased. In the second quarter, Baidu held close to 90% of China’s online search advertising market, collecting one-third of the total online ad marketing dollars. They are expected to collect $8 billion in ad revenues this year, and that figure could grow to more than $10 billion next year. Since the beginning of the year, Baidu’s stock price has increased 33%.

Baidu Shifts Focus to Mobile

Evidence has mounted that Baidu has successfully made the transition to a mobile platform, as they have positioned the company to be even more dominant in mobile search with an 80% market share in this market. Last year, they started a heavy marketing effort to ensure they had a foothold across the entire mobile ecosystem, paying to have many of its diverse apps preinstalled on smartphones. This appears to have paid off even as the pre-installation fees have risen, with close to 90% of Baidu’s PC users switching to their mobile apps, allowing them to attain the 80% market share in mobile. This apparent dominance in mobile is key to the company’s growth, as mobile revenue is growing much faster than online ad revenue and mobile search will be the key engine for the whole search engine market. This is possible because China leads the world in the number of mobile phone users.

Source: iResearch

Baidu’s third quarter earnings report was extremely positive because of their gains in the mobile search market. Revenue increased 52% from a year earlier to $2.2 billion, and net profits rose by 27% to $631 million. The increased pre-installation fees have eaten up much of the profits, but the cost should stabilize as the market becomes saturated with mobile phones allowing Baidu’s margins to improve. Baidu also announce that mobile traffic surpassed its online traffic in the third quarter, and that mobile business accounted for 36% of revenue during the period. The increase in mobile traffic is a little misleading, as tablet search was switched from online to mobile, but the revenue from mobile is still extremely encouraging. While mobile revenue has not yet caught up, it is expected to pass PC revenue soon.

Algorithmic Analysis

I Know First is a financial services firm that utilizes an advanced self-learning algorithm to analyze, model and predict the stock market. The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions.

The signal represents the predicted movement direction or trend, and is not a percentage or specific target price. The signal strength indicates how much the current price deviates from what the system considers an equilibrium or “fair” price. The signal can have a positive (predicted increase) or negative (predicted decline) sign. The heat map is arranged according to the signal strength with strongest up signals at the top, while down signals are at the bottom. The table colors are indicative of the signal. Green corresponds to the positive signal and red indicates a negative signal. A deeper color means a stronger signal and a lighter color equals a weaker signal.

The predictability indicator measures the importance of the signal. The predictability is the historical correlation between the prediction and the actual market movement for that particular asset, which is recalculated daily. Theoretically the predictability ranges from minus one to plus one. The higher this number is the more predictable the particular asset is. If you compare predictability for different time ranges, you’ll find that the longer time ranges have higher predictability. This means that longer-range signals are more important and tend to be more accurate.

The figure above is an algorithmic forecast from the Tech Stocks package made on August 29th, 2014, for the three-month time horizon. Baidu had a signal strength of 3.33 and a predictability indicator of 0.11. In accordance with the algorithm, Baidu’s stock price increased 15.07% over the next three months.

Future Outlook

While Baidu has a positive outlook for the future in the mobile search market in China, they are not satisfied. Their CFO recently stated that mobile search will soon be almost exclusively audio and visual. This claim comes after Baidu recently teamed up with Tencent Holdings Ltd. and Dalian Wanda, China’s largest commercial property owner. The partnership will make it possible for consumers to make offline purchasing decisions, such as taking a picture of someone else’s outfit to find out where they can get it or a voice search of where to see a movie nearby. Baidu has invested heavily in learning programs to support these new searches.

Baidu also increased their stake in iQiyi.com, a video streaming platform. Xiaomi, Inc., one of the world’s largest smartphone makers, recently invested $300 million in the site, as the companies work together to get distribution rights to more than 1,000 U.S. movies. This partnership will help the companies bring video streaming in China into a new era, as they will collaborate with Hollywood studios to make original content. Baidu has also started to expand into other markets, including Indonesia. This country provides an interesting opportunity, as they are a mobile first market. Users from this generation forward will experience their first taste of the Internet via mobile devices, and there is still large room for growth in their mobile markets.