Baidu Bets Big on O2O

According to iResearch, the Online-to-Offline or O2O service industry is expected to grow between 20% and 50%. The CAGR in the reverse Offline to Online industry is expected to surpass 600%. Baidu is now keenly focused on tapping this opportunity.

Baidu’s Financials

Baidu’s second quarter revenues increased 38% over the year to RMB 16.575 billion (~$2.67 billion). EPS of RMB 11 (~ $1.79) was higher than the market’s forecast of RMB 9.75 (~$1.59). Net income improved 3.3% to RMB 3.662 billion ($590.6 million). Non-GAAP earnings per ADS were RMB 11.19 ($1.81). Mobile revenue represented 50% of total revenues for the second quarter of 2015, flat from the previous quarter. Analyst estimates were $1.87 in earnings per ADS on $2.67 billion in revenue.

By segment, revenues from online marketing services grew 37.1% to RMB 16.23 billion (~$2.62 billion). Active online marketing customers for the quarter grew 20.9% over the year and 12.6% over the quarter to 590,000. Revenue per online marketing customer during the quarter grew 13.2% to RMB 27,400 (~$4,419). Traffic acquisition costs were 12.7% of total revenues, flat from 13.5% in the first quarter of 2015.

Among other metrics, mobile search monthly active users (MAU) were up 24% to 629 million and mobile maps MAUs were up 48% to 304 million for June 2015. During the second quarter, they integrated ride-sharing services of Uber and other carpooling services with Baidu Maps. Baidu claims that its Maps app has covered 70 percent of the Chinese mobile maps market where its competitors include AutoNavi as well as Sogou Maps and Tencent Maps.

At the end of June, daily active users for the Mobile Baidu search app and daily Baidu universal log-ins had reached the milestone of 100 million. Baidu continued to build out its ecosystem through Baidu Connect, which now has over 760,000 merchants. Baidu Wallet active users reached 35 million by June. Revenue for its IQiyi service climbed to RMB 1 billion.

Baidu ended the quarter with cash, cash equivalents and short-term investments of RMB 74.959 billion ($12.090 billion).

For the third quarter, Baidu expects total revenues to grow 34.4% to 37.4%, in the range of RMB 18.170 billion ($2.931 billion) to RMB 18.580 billion ($2.997 billion), missing the analyst forecast of RMB 18.79 billion.

Baidu’s O2O Strategy

Traditionally, search is considered as a tool to connect people with information, but Baidu’s new line of thinking is that in the age of mobile, search can function as a tool for connecting people with services. Online-to-offline or O2O is now a major strategic focus for Baidu. Called Next Baidu, this new stage of growth aims to unleash not only the potential of mobile platforms, but also the enthusiasm of Chinese consumers as they increasingly turn to mobile to engage and transact. By enclosing businesses within its O2O ecosystem, Baidu hopes to discourage users from using third-party apps, which reduce user dependence on its services.

During the earnings call, CEO Robin Li said that Baidu O2O services together address a RMB 10 trillion ($1.6 trillion) local e-commerce market, which includes restaurants, takeout food and grocery delivery, entertainment, online travel, and other verticals.

O2O GMV consists of Qunar, Baidu Nuomi, and Baidu Takeout Delivery. GMV for O2O services grew 109% over the year to RMB 40.5 billion ($6.5 billion). This makes Baidu the fastest growing e-commerce platform by GMV and the fourth largest in China behind Alibaba, JD, and Ctrip.

Over the past year, Baidu has successfully integrated Nuomi into the Baidu family. Baidu Nuomi has nearly doubled its market share by GMV since January this year. It now covers 400 cities and is currently number one by GMV in about 60 of them. Baidu recently announced plans to invest RMB 20 billion ($3.2 billion) over the next three years in Nuomi to address the local e-commerce opportunity. It had teamed up with Tencent and Wanda last year to form an RMB 5 billion (about $814 million) e-commerce joint venture to take on Alibaba. 

The market is not happy with the heavy O2O investment and several analysts have downgraded the stock. Pacific Crest Securities analyst Cheng Cheng says,

“While a shift to O2O could eventually lead to higher monetization, we believe greater competition may inhibit significant monetization for years. Specifically, we see platforms like Meituan, Dianping, Alibaba Group (NYSE:BABA), JD.com (NASDAQ:JD) and Tencent Holdings (OTCPK:TCEHY) as key competitors alongside a variety of smaller, vertical-specific players that are mostly private.”

However, Jefferies analyst Cynthia Meng has upgraded Baidu to Buy with a price target of $210.

Its market value has eroded by almost 50% this year to $46.77 billion on concerns over the China slowdown and O2O investments. Its stock has tumbled down from its 52-week high of $251.99 to the current price of $133.06. Its 52-week low is $100.