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Baidu Chief's Vision Has Paid Off 4,164%

Years before China topped the list of the world's largest Internet populations, Baidu co-founder Robin Li set a foundation that would let his company rise alongside the Web boom.

Even when Baidu (BIDU) debuted in the U.S. stock market in 2005, five years after the search engine's founding, just 8% of China's population regularly logged onto the Web. That was vs. 70% penetration in America.

But CEO Li from the start emphasized that Baidu would focus on growing in unison with China's nascent Internet population.

"I urge everyone to look forward, to look beyond today and try to envision the capacity of this market 10 to 15 years from now," Li told analysts in November 2005, on Baidu's first conference call as a public company. "The growth potential of China's Internet industry is greater than that of any other region in the world.

Time would prove Li and co-founder Eric Xu correct, and shareholders have cheered.

No. 1 In China

Baidu developed a search engine good enough to quickly grab the majority of Web searches, and has been the reigning search engine in China since at least 2004.

China is one of just a handful of countries where Google (GOOG) doesn't hold the No. 1 spot in search.

It helps that a still ongoing censorship dispute between Google and China's government has slashed Google's presence and share of the China search market.

Entrenched as China's dominant search service provider, Baidu stock has climbed along with China's Internet user growth. Shares priced for Baidu's August 2005 U.S. IPO at 27 started trading at 66 and jumped 354% from the IPO price on the first trading day, to 122.54 (not adjusted for a later stock split).

The stock came under pressure, then ran up 867% from its all-time low in early 2006 until late 2007, when the Great Recession hit.

Baidu stock bottomed at a split-adjusted 10.05 in December 2008 before entering its biggest period of growth, rising 1,551% by July 2011.

This past March 7, the stock touched its all-time high of 189.34, up 1,784% from that 2008 low and 4,164% from 2006.

That performance places Baidu among the top U.S.-traded stocks of the past 30 years.

Winning Method

Baidu's algorithm — the code behind its search engine — assigns a higher rank to websites that have a lot of home-page content, Philip Qian, a blogger at MarketingToChina.com, told IBD via email from Shanghai.

Because the most popular websites in China often are the ones that are jammed with links and info, that has set Baidu apart from Google and other competitors.

Baidu's algorithm also tracks website loading times. That method benefits the locally hosted sites that most users are looking for, says Qian.

"Basically speaking, a server in mainland China will be the best choice, but Chinese government requires an ICP certificate, which blocks most foreign companies from applying a server in mainland China," Qian said.

Baidu also keeps pace with — and sometimes beats — Google on new features.

Google in 2012 released its knowledge graph feature that added in-depth semantic information on people and places to search results. Observers pointed out that Baidu already had a similar feature. Baidu "has been dabbling in semantic search since 2009," noted Search Engine Watch blogger Adaline Lau.

In the meantime, Internet growth in China continues. The nation ended 2013 with an Internet penetration rate of 45.8% . That is, 618 million people in China are Internet users, according to the official China Internet Network Information Center. Pew Research says the U.S. closed 2013 with an 87% penetration rate.

To understand how much Li believed in China's Internet growth, you might have to go back to January 2000, when the future CEO — who at times has ranked as the richest man in China — founded Baidu. The man who went by Yanhong Li at the time had earned a master's degree in computer science in 1994, according to his University of Buffalo alumni profile.

Li, who through a spokesman declined to comment for this story and gives few interviews, worked in Silicon Valley as an engineer at early search engine Infoseek from 1997 to 1999.

That stint gave him insight into search engine algorithms.

After leaving Infoseek, Li returned to China with $1.2 million in funding to get Baidu off the ground.

Being Better

Like Google, his company got its start selling search features to other companies.

In the summer of 2001, just after the dot-com bubble burst, Li made his fateful decision to convert Baidu's search into a stand-alone consumer product.

That was a tough call, he told a class at Stanford University in 2009, because it put Baidu at odds with former clients.

"When you decide to become a front-end, consumer-oriented service, you really need to become better than your competition — not just a little bit better, but significantly better," Li said in his 2009 Stanford address , one of the last times he has spoken publicly at length.

Baidu has room to grow, say observers. The company has a potential market of 1.36 billion people (China's population), and that doesn't include its potential outside China, says Gareth Soloway, chief market strategist at research firm InTheMoneyStocks.com.

"If Google has a valuation of $372 billion, why can't Baidu have a valuation four times as great?" said Soloway, comparing the populations of China and America.

Baidu hopes again to follow the Chinese crowd on its next growth path.

Mobile Internet users in China exceed 500 million, tops in the world, spurring Baidu to invest heavily in mobile technology.

Cumulative mobile app downloads via Baidu's 91 Wireless Web store were 14.9 billion as of March 17, up from 9.3 billion at the end of 2013, according to T.H. Capital data. They add up to 5.6 billion downloads in less than a quarter vs. 2.6 billion downloads in Q4.

"Adoption of mobile products could be strong" for Baidu, said T.H. Capital analyst Tian Hou.

Baidu's gains in the market since 2012 have been all the more impressive, since the company for the first time has a major competitor in search.

61% Market Share

Despite upstart search competitor Qihoo 360 (QIHU), which launched in August 2012, Baidu has held its lead in China's search market.

Qihoo had used Google's search on its popular site before deciding to do its own.

In 2013, Baidu handled 61% of all searches in China, according to local research firm CNZZ.

Qihoo grabbed about 25%.

Sohu's (SOHU) No. 3 search engine, Sogou, has 12.5%, with No. 4 Google at less than 1.5%.