Morningstar | Baidu's Business Strategy and Outlook
Baidu has the urgency to strengthen its mobile business because it has not developed another industry-leading business other than its mobile search app for years. Baidu’s share of mobile time spend reduced to 6.9% in March 2019 from 7.3% year over year. Baidu positions its flagship Baidu app (173 million DAU in March 2019) as a "super" app that can serve a wide range of users' needs such as reading, watching videos, shopping, transportation tickets, food services and so on, but we believe Baidu App is less of a "super" app compared with Tencent’s Wechat (1.1 billion MAU). It has copied the strategies of its peers by launching a mini program (181 million MAU in March 2019) and short video apps (sevenfold year over year increase to 98 million MAU in March 2019 as per Questmobile). We have not factored in the meaningful commercialization of Baidu’s AI-based services, such as voice assistant platform DuerOS, autonomous driving platform Apollo and AI cloud services. Search is driven by an AI-powered algorithm, giving Baidu a good foundation in this segment. Baidu is also one of the largest and earliest companies to start AI investments in China. Currently, Baidu utilizes artificial intelligence to recommend feeds to Baidu App’s users to generate advertising revenue. IQiyi, Baidu’s online video platform, has been a key growth driver stemming from increasing willingness to pay for premium content in China and continuous advertising demand on iQiyi. It accounted for 29% of Baidu’s revenue in the first quarter of 2019.In the near term, Baidu will invest heavily in its mobile business in terms of sales and marketing, and traffic acquisition. While meaningful monetization is uncertain, we expect Baidu to increase or maintain its research and development expenditure, which is at 17% of sales in the first quarter of 2019. To fend off major competitor Tencent Video, iQiyi needs to continue to invest in premium content. Therefore, we expect Baidu’s margins to be under pressure in the near term.
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