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How Baidu is Stacking the Deck Against the Competition

Shares of Baidu (NASDAQ: BIDU) rallied 42% last year as the Chinese search giant's annual revenue growth roared back into positive territory over the past three quarters. However, I believe that Baidu still has plenty of room to run since it's stacking the deck against the competition in five significant ways.

1. Dominating the Chinese search market

Alphabet's Google exited the mainland Chinese market in 2010 after clashing with regulators over censorship issues. That left the market wide open for Baidu, which now handles over 70% of the country's online queries.

Image source: iTunes.

Baidu's only real rival is Alibaba's (NYSE: BABA) Shenma, which currently controls 15% of the market. Other rivals -- like Qihoo 360's Haosou and Sohu's Sogou -- hold single-digit market shares.

This makes Baidu the 800-pound gorilla of the search market, and a likely first stop for online advertisers. That's why its online marketing revenues rose 22% annually last quarter, and its revenue per online marketing customer jumped 31%.

2. The expansion of its ecosystem

However, Baidu still faces the threat of disruptive ecosystems. For example, Tencent is expanding (NASDAQOTH: TCEHY) WeChat, the most popular messaging app in China, into a single "super app" platform for mobile payments, games, ride hailing, deliveries, and other services. These O2O (online-to-offline) services tether users more tightly to WeChat, and reduces their dependence on Baidu's search services.

However, Baidu is fighting back by adding similar O2O services to its mobile app. For example, it recently partnered with JD.com to allow users to directly buy goods from JD's marketplace from within the Baidu app.

As a result, Baidu's mobile revenue continues to grow, accounting for 73% of its top line last quarter -- up from just 64% in the prior year quarter.

Image source: Getty Images.

Baidu also owns iQiyi, the top streaming video platform in China with 78 million daily active users (DAUs) on PCs and 160 million DAUs on mobile devices, according to iResearch. It might spin that business off via an IPO later this year at a valuation of up to $10 billion.

Baidu also has a presence in the fintech market with its Financial Services Group, which offers wealth management products, loans, and an online-only bank. Baidu integrates those services into its mobile payment platform Baidu Wallet, which had 100 million activated accounts at the end of fiscal 2016.

3. Artificial intelligence

To process its daily queries into actionable data, Baidu is upgrading its AI capabilities with its "Baidu Brain" unit. This division improves the company's machine learning algorithms, core search technologies, and big data applications.

Baidu Brain created its virtual assistant Duer and the accompanying DuerOS platform, which third-party hardware makers can access via APIs. It opened labs in Silicon Valley to deepen its ties with other tech companies, and it's building a state-backed engineering laboratory for deep learning technologies in China.

Baidu is constantly expanding this unit's reach with new partnerships. For example, Baidu recently partnered with Xiaomi, the country's fourth-largest smartphone maker, to explore new opportunities in voice recognition, deep learning, and computer vision, as well as produce additional DuerOS apps.

4. Driverless cars

Baidu Brain also developed Apollo, an open-source platform for driverless cars, last year. Dozens of major companies -- including NVIDIA, Microsoft, Ford, and Intel -- are already signed up. It's also testing out its own driverless cars in China.

Image source: Getty Images.

The Chinese government wants semi-autonomous cars to account for half of all car sales by 2020, and for "highly" autonomous ones to account for 15% of the total by 2025.

With a first mover's advantage in this space, Baidu could eventually tether driverless vehicles to its O2O ecosystem, search engine, maps, and other cloud services -- which would widen its moat against rivals like Alibaba and Tencent.

5. Investments in new technologies

Lastly, Baidu has been setting aside lots of money for forward-thinking investments. In late 2016, it established a $3 billion fund called Baidu Capital for internet-related investments.

Last September, it launched the $1.5 billion Apollo Fund for investments in driverless technologies. It also recently launched the $200 million Apollo Southeast Asia fund with Singapore-based Asia Mobility to focus on regional driverless investments.

Through those funds, Baidu now holds investments in companies like auto e-commerce platform Bitauto, limo booking app Shouqi, Chinese automaker VM Motor, acoustics and AI firm SoundAI, and enterprise database platform provider TigerGraph. Not all of these investments will pay off, but Baidu just needs a few to flourish over the next few years.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Leo Sun owns shares of Baidu, Ford, and Tencent Holdings. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Baidu, Ford, JD.com, Nvidia, and Tencent Holdings. The Motley Fool recommends Intel and Sohu.com. The Motley Fool has a disclosure policy.

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