Baidu Seeks This New Market in China

Baidu Inc. (NASDAQ:BIDU) is China’s largest search engine. The company has seen rapid growth in its online search market since U.S.-based Google Inc. (NASDAQ:GOOG) decided to scale back its Chinese exposure in 2010 amid censorship concerns. However, Baidu has yet to build a commanding lead in mobile search.

According to research firm Analysys International, Baidu holds 78.3 percent of China’s online search market by revenue, while its mobile search service receives about 35 percent of total unique website requests. In an effort to gain mobile search market share, Baidu announced on Tuesday it will launch a low-cost smartphone with Foxconn Technology Group, Sichuan Changhong Electric Co. and China Unicom. The Changhong H5018 will run on a modified Android platform that uses Baidu’s cloud technology and display a 3.5-inch screen. The smartphone will also contain 100GB of storage and a 3-megapixel camera. Baidu did not announce a release date but said it will be available in the “very near future.” The cost is about $1,000 yuan ($160).

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As the chart above shows, it has been a tough year for several mobile companies. Shares of Baidu are up 5 percent higher year-to-date, but have declined more than 16 percent in the past month. Meanwhile, Nokia (NYSE:NOK) and Research in Motion Ltd. (NASDAQ:RIMM) shares have dropped 39 percent and 21 percent year-to-date, respectively. Despite trading nearly $100 off its all-time highs made in April, shares of Apple Inc. (NASDAQ:AAPL) have been the clear winner, gaining almost 40 percent for the year.

Last month, Baidu reported strong first-quarter results, but offered weak guidance. It now expects second-quarter revenue to be $847 million to $867 million, compared to expectations of $860 million by analysts. The lower guidance suggests that the benefit from Google exiting the Chinese search engine space may be slowing. Baidu needs a ‘Catalyst for a Stock’s Movement’ in our CHEAT SHEET investing framework. The WSJ reports, “Baidu has hired more than 1,000 engineers to help it build its mobile offerings. The new Baidu Cloud operating platform is designed to target the growing number of Chinese consumers who use mobile devices to access the Internet to use Baidu’s services.” The new mobile offerings from Baidu may serve as the much needed catalyst, but it will be challenging as Apple continues to plant seeds in China.

Apple reported record breaking results in the previous quarter. China produced almost $8 billion in revenue, up threefold from year-over-year. “It is mind-boggling that we can do this well,” explained chief executive officer, Time Cook. Apple’s revenue in China for the first half of the fiscal year totaled $12.4 billion, compared to $13.3 billion it made in the entire previous fiscal year. China growth has been fueled by new deals with China Telecom (NYSE:CHA) and China Unicom (NYSE:CHU).

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