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Baidu Earnings Miss Estimates As Growth Continues To Slow

Baidu reported fourth-quarter profit Monday that narrowly missed Wall Street estimates as China's search giant invests heavily in mobile ad technology.

Earnings rose 39% to $1.28 per ADR, a penny less than analysts expected. Revenue leapt 42% to $1.02 billion, edging past views of $1.01 billion.

Baidu (BIDU) shares initially rose in after-hours trading — perhaps because less-watched non-GAAP earnings met forecasts for $1.31.

But the stock soon retreated, falling 6% late. During the regular session, Baidu slid about 1%.

Baidu sees Q1 revenue of $945.4 million to $975.9 million — $960.7 million at the midpoint. Analysts polled by Thomson Reuters expected $963.8 million.

As expected, Baidu continued to invest in mobile advertising technology in Q4, as it looks for new revenue streams. Sales in the year-ago quarter grew 91%, and growth declined throughout 2012.

Baidu is "at the heart" of China's Internet, and "we're excited to embrace and lead the next stage of mobile- and cloud-centric Internet growth," Baidu CEO Robin Li said in a statement.

Baidu boosted research spending by 70% to $112.6 million in Q4, it said in a press release.

Baidu's investment will boost how much advertisers will pay for mobile ads, wrote CIMB Group analyst Jonathan Ng. The spending mirrors Google's (GOOG) investment in mobile ad technology, he noted. He rates Baidu at outperform.

Google, Baidu and Facebook (FB) are increasingly reliant on mobile for user growth, but mobile ads pay far less than traditional online advertising.

China's mobile Internet users have reportedly hit 420 million people, or about 75% of all Internet users in China, by the end of 2012. Some on Wall Street see plenty of potential for Baidu to grow mobile users, as more than 1.11 billion people already have used cellphones to make calls and send messages, according to a Januaryreport from the official Xinhua News Agency.

Not every analyst is bullish about Baidu's mobile ad future. Some, like Maxim Group's Echo He, think rivals like Qihoo 360 Technology (QIHU) will grab more of the desktop search market as Baidu focuses on mobile. Qihoo has about 10% of China's search market. Baidu has over 60%.

Baidu's mobile strategy "will likely return lower revenues and profits than Baidu's existing business," wrote He, who initiated coverage with a sell rating in January. "Thus, Baidu's growth should decelerate regardless of the economy.

Baidu also is paying more to host its ads on other websites, it says. Traffic acquisition costs rose to 9.6% of revenue in Q4 vs. 7.9% a year earlier. Revenue per user rose 7.6% vs. a year earlier, but fell 3.1% from Q3.