Baidu (NASDAQ: BIDU ) is considered by many to be the Google of China, and given the country's large population, it is a company with high expectations. However, while Baidu's stock continues to trade around all-time highs, and analysts praise its growth, there are real concerns lingering around the search giant. Specifically, three big problems.
Baidu continues to lose PC market share
In China, Baidu is the leader of Internet search with a 54.5% share of the market in PCs, according to Chinese statistics site CNZZ. While good, Baidu's share has shrunk from a high of nearly 80% in late 2012 and 67.7% last year. The beneficiaries of Baidu's loss are Qihoo 360 (NYSE: QIHU ) and Sohu (NASDAQ: SOHU ) .
Sohu is the majority owner of a search engine called Sogou, whose share has risen from under 10% last year to nearly 13% today according to CNZZ. While impressive, it is nowhere near the success of Qihoo 360, which is predominantly a provider of PC and mobile security services and applications.
Qihoo has nearly 500 million users of its PC products and its most popular mobile application, Mobile Safe, has 641 million users, a number that has doubled year over year. Therefore, with a large network of users connected to its product, Qihoo has leveraged that presence to create its own search engine.
As a result, Qihoo's PC search market share is pegged at 30%, up from its 25% share earlier this year and 16.3% in early 2013. However, like Google, Baidu's advertising and monetization products have grown more sophisticated in recent years. Therefore, it continues to produce revenue growth despite losing market share, as Internet search as a market continues to grow.
Nonetheless, Qihoo 360 is quickly closing the gap, suggesting that Baidu is not invincible in the search market.
Qihoo is entering mobile with a vengeance
Earlier this year analysts estimated that Baidu controlled nearly three-quarters of the combined PC and mobile search business in China. Given its decline in PCs, investors can assume that it has a strong grasp over the mobile market.
In particular, Baidu said after its most recent quarter that monthly active search users had surpassed 500 million in mobile search . As a result, Baidu's mobile revenue as a percentage of its total has followed the same trend of other big Internet-based companies, like Facebook, and during the second quarter became 30% of total revenue.
The problem is that Qihoo 360 released a mobile search service back in June of this year. However, Qihoo 360 has not yet providied any user details on the application, nor has it reported any revenue from mobile search. Although, given the rate at which it grew in the PC space combined with its most used application being on mobile, Baidu investors should be fearful that its mobile search dominance could experience the same fate as its PC market share.
There's more for Baidu to fear than Qihoo 360 in mobile
If Qihoo 360's ability to steal PC Internet search market share from Baidu, along with Qihoo's entrance into mobile isn't enough to scare Baidu investors, then perhaps Alibaba will do the trick. Back in June, Alibaba bought out the mobile browser and mobile search giant UCWeb.
Reportedly, UCWeb has a 50% share of China's mobile browser market and 20% of its search market. UCweb's mobile search engine is called Shenma, and while its reported 100 million active monthly users lag Baidu's 500 million, it should be noted that Shenma did not launch until earlier this year.
Therefore, it has penetrated the mobile search market quickly, and with Alibaba by its side, Baidu investors shouldn't be so confident that its leading mobile presence is sustainable.
Foolish thoughts
Baidu's mobile search success may seem like a long-term blessing right now, but when considering the rate at which it lost share to Qihoo 360 combined with the rise of Shenma and other mobile search engines, the company's core business is most certainly at risk. So, with nearly $6.5 billion in 12-month revenue, the majority of which comes from search, and expected revenue growth of 54% and 40% over the next two years, respectively, expectations are high, and Baidu is yet to prove to investors that it can maintain market share. Therefore, Baidu's future doesn't look nearly as promising as its past, and investors might be best suited by avoiding the temptation of investing in the so-called Chinese Google.
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