Week in Review: Stocks Shake Off Health Care Worries to Climb for Week, First Quarter

Wall Street ends the week, and first quarter, with gains as stocks shrug off worries over the Trump administration to continue their grind higher.

Wall Street ended the week, and first quarter, with gains as stocks shrugged off worries over the Trump administration to continue their grind higher.

The Dow Jones Industrial Average began the week with another day of losses, extending its streak to an eighth day and the worst since 2011. However, the Dow and other benchmark indexes turned around to post gains for the whole week.

The worry had been that Donald Trump and House Republicans' failure to push health care reform through to a vote signaled trouble for the likelihood of other campaign promises, including tax cuts and infrastructure spending. That concern was mostly placed on the backburner this week with investors preferring to give Trump the benefit of the doubt.

"You can rationalize the lack of a sell-off by arguing that the health care debacle has no impact on tax reform," Vincent Deluard, vice president of global macro research at the BD Division of INTL FCStone Financial, told TheStreet. "It is difficult to predict U.S. legislation in general, and almost impossible in the age of Trump. The only forecast I would make is that the stock market has priced in a big tax deal for both corporations and individuals, and that it will be disappointed if it does not get it."

The GOP's failure to repeal and replace Obamacare, a major campaign commitment, had previously been viewed as a litmus test for Trump's ability to achieve major change in Washington. Trump had promised major tax reform and regulatory rollbacks, both which look like tougher sells after the clumsy handling of health care reform -- the bill appeared to be rushed through and was pushed toward a vote even without a healthy margin of support in Congress. The bill was pulled late Friday afternoon after two days of voting delays. House Speaker Paul Ryan said Tuesday that he had not formulated a timeline for a fresh attempt at health care reform.

The Dow ended the week 0.32% higher, the S&P 500 climbed 0.80%, and the Nasdaq rose 1.4%. Benchmark indexes fared even better over the first quarter, benefiting from the height of the "Trump rally." The Nasdaq logged the best gains of the three major benchmark indexes with an increase of 10% over the first three months of the year. The S&P 500 closed up nearly 6% for the first quarter, while the Dow rose almost 5%. The Dow's gain is its sixth quarterly increase in a row, the longest stretch since the end of 2006.

The United Kingdom took the expected first step to formally remove itself from the European Union earlier this week, a relationship that has lasted more than four decades. U.K. Prime Minister Theresa May activated Article 50 of the Lisbon Treaty Wednesday morning by notifying European Council President Donald Tusk by way of letter. The notification kicks off two years of negotiating trade, immigration, and other economic deals between the U.K. and the EU.

The U.K. voted in favor of "Brexit" last summer in a shock win that rocked markets at the time. However, global markets mostly have readjusted to the new reality just as they did following Trump's surprise election win in November. Analysts note that the long lead time heading into Article 50 means that markets have mostly priced in the move by Wednesday.

The U.S. economy grew at a faster pace than anticipated in the fourth quarter, further proof that the president inherited a solid economic foundation from predecessor Barack Obama despite Trump's calls to the contrary. The economy grew at a pace of 2.1% from October to December, up from a previous estimate of 1.9%, according to the third and final estimate of fourth-quarter GDP. Analysts anticipated the measure to tick up to 2% growth over the period, the final full quarter under the Obama administration.

Consumer confidence surged in March, continuing upward trends seen in the past few months. Confidence rose to a reading of 125.6 in March, according to the Conference Board, the highest level since December 2000. The index sat at 116.1 in February. Analysts had anticipated a small dip in March after the index reached a post-recession high last month.

Crude oil closed with quarterly losses of 5.8%, even as the commodity settled Friday at its best level in more than three weeks. Oil had a positive week as a weekly reading on domestic inventories showed a smaller-than-expected rise and production disruptions in Libya increased hopes of a hit to global output.

It was a quiet week on the earnings calendar. BlackBerry (BBRY) narrowed its loss from a year earlier and posted above-consensus adjusted profit. The company anticipates adjusted earnings over fiscal 2018.

Lululemon Athletica (LULU) issued a weak outlook for the first quarter. The athletic apparel brand anticipates first-quarter revenue no higher than $515 million and earnings between 25 cents to 27 cents a share. Analysts anticipated earnings of 39 cents a share on sales of $552 million. Fourth-quarter earnings also missed estimates.

Keris Alison Lahiff

Source: https://www.thestreet.com/story/14068098/1/week-in-review-stocks-shake-off-health-care-worries-to-climb-for-week-first-quarter.html

Bull of the Day: HealthStream (HSTM)

HealthStream (HSTM - Snapshot Report) has seen its estimates increase due to a solid Q1 earnings report where subscriber growth for the Workforce Development Solutions segment was the main driver.  Further, revenues grew +23% year over year, while contracted subscribers increased +15% year over year.  These combined factors has made HealthStream the Zacks Bull of the Day.

For all intended purposes, HealthStream has a solid grip on the healthcare education market, and is considered the industry leader.  The company boasts of having their customer base represented by over half the nation’s hospitals, and about 4.1 million healthcare professionals, who have all chosen HealthStream’s platform of products and solutions. This Zacks Rank #1 (Strong Buy) stock is known for pioneering Web-based solutions to meet the training and education needs of the healthcare industry utilizing a proprietary system.  Through strategic relationships with medical institutions and commercial organizations the company has amassed hours of training and educations courses.  The company distributes hours of these courses online to allied healthcare professionals, nurses, doctors, and other healthcare workers.

Their Workforce Development Solutions segment is the main driver for the company where each sub-segment saw growth above or in line with management’s expectations.  Also, the Patient Experience Solutions segment, second largest segment, saw +8% year over year growth, and has recently contracted two large health systems for just over $1 million in services. 

Price and EPS Surprise

The graph below shows the Price and +EPS Surprise for HealthStream.

Increasing Estimates

Over the past 7 days, estimates have increased for Q2 15, Q3 15, FY 15, and FY 16; Q2 15 rose from $0.04 to $0.06, Q3 15 increased from $0.06 to $0.08, FY 15 jumped from $0.22 to $0.32, and FY 16 rose from $0.39 to $0.43. 

Company Data

Bottom LineHealthStream’s dominate position in healthcare education and training has produced 10 consecutive quarters with revenue growth, while containing COGS and SG&A to reasonable levels.  During the same 10 quarters, the company has also increased Total Assets each quarter.  These are all indications of a solid growth company.

After their fifth consecutive earnings beat and solid client pipeline HealthStream has earned its spot as the Zacks Bull of the Day.  Further, with high expectations, and increasing estimates, it is expected that this company will continue to grow over the next few quarters.

by Brian Hamilton

Source; http://www.zacks.com/commentary/44154/bull-of-the-day-healthstream-hstm

4 (More) Biotech Stocks to Buy

The risks may be above average, but so are the potential rewards

Back on Aug. 4, yours truly took a detailed look at four biotech stocks with a lot of upside potential.

Nothing’s changed about those names — they’re all still great stocks to buy, even if a couple of them have firmly advanced in the meantime.
The great part about trading biotech stocks, though, is that there’s always a fresh flow of new opportunities.
To that end, here’s a closer look at four more biotech stocks you may want to put on your watch list … if not in your portfolio.

Biotech Stocks to Buy: Jazz Pharmaceuticals (NASDAQ:JAZZ)

It’s a rarity to come across biotech stocks of companies that are profitable but also have a pipeline that could be considered game-changing. So, when one is found, at the very least it deserves a spot on a watchlist of potential stocks to buy.
Enter Jazz Pharmaceuticals plc (NASDAQ:JAZZ[2]).
Jazz Pharmaceuticals is the name behind eight different drugs available in the United States[3], with some of them available overseas as well. None of them could be considered remarkable, but all of them are decidedly marketable — as well as profitable. That’s the “value” aspect of JAZZ stock.
The “growth” aspect of a stake in Jazz Pharmaceuticals stems from its pipeline, which includes JZP-110 and JZP-386. JZP-110 is in Phase 2 trials as atreatment of EDS (extreme daytime sleepiness) for patients with narcolepsy. JZP-386 is in Phase 1 development as a straight-up treatment for narcolepsy; even with some recent dosing issues, JZP-386 is compelling. Neither drug is apt to become so-called blockbusters, but both represent more high-margin revenue for Jazz Pharmaceuticals.
Dependable, profitable revenue now? More revenue later? What’s not to like?

Biotech Stocks to Buy: Celgene Corporation (NASDAQ:CELG)

Stepping into Celgene Corporation (NASDAQ:CELG[4]) right now isn’t exactly for the faint of heart. If you’re willing to take a calculated risk though, there’s a good reason to add CELG stock to your list of biotech stocks to buy here.
The bet: On Feb. 22, the FDA is expected to decide whether or not REVLIMID — a multiple myeloma treatment made by Celgene — will be approved in the United States as a first-line therapy for the disease.
REVLIMID is already approved as a means to treat relapse patients that have already tried one of the approved first-line drugs, generating $5 billion in sales last year. If approved for this purpose, Celegene believes the drug could generate up to $2 billion more in revenue per year.

Biotech Stocks to Buy: bluebird bio Inc (BLUE)

To be perfectly clear, the value of bluebird bio Inc. (NASDAQ:BLUE) shares lies mostly in the potential approval of a drug currently in early trials. As encouraging as it may look (more on that in a moment), the time between now and an actual approval is measured in years, and plenty could happen in the meantime. That being said…
As veteran traders of biotech stocks can attest, the market rewards research and development milestones as they’re met. And, it looks like one of the drugs in development by bluebird is setting itself up for a string of exciting updates.
That drug is LentiGlobin BB305, as a treatment for beta-thalassemia (a blood disorder the crimps the production of hemoglobin). Though there’s still a great deal of R&D left to be done, the fact that the FDA recently granted LentiGlobin BB305 a “breakthrough therapy” status, which suggests there’s a major need the agency is hoping this drug could meet.
Though it’s still not the safest of biotech stocks to buy, it’s an interesting prospect for the risk-tolerant.

Biotech Stocks to Buy: Illumina, Inc. (ILMN)

A couple years ago when genome sequencing was young yet marketable, Illumina, Inc. (NASDAQ:ILMN[7]) was one of a few stocks that were all the rage … possibly because it was caught up in the gene sequencing M&A bonanza of 2012.
It’s proverbially fallen off the radar, however, as the industry became old hat. Big mistake.
Over the course of 2013 and 2014, Illumina improved its annual revenue by 62%, more than doubled its net income, and — oh yeah — ILMN stock gained 250%.
And there’s plenty more where that came from. Though the sequencing industry has exploded since 2012′s M&A bonanza, it’s still nowhere close to its full potential. Some industry experts believe the business could be worth more than $10 billion by 2014, well up from 2013′s global total of less than $5 billion.
As for why ILMN stock is one of the best biotech stocks to buy as a way to get into the gene-sequencing game, aside from the fact that it’s profitable, Illumina is also the technological leader in genome sequencing technology.
That’s allowed it to secure its place as the low-cost gene-mapping name too. Its HiSeq X hardware can sequence a genome for only $1,000, and the company could continue to lower that price … right down to a level that makes gene-sequencing a routine procedure.

By James Brumley 
As of this writing, James Brumley did not hold a position in any of the aforementioned securities

Source:http://investorplace.com/2015/02/jazz-celg-blue-ilmn-4-more-biotech-stocks-to-buy/#.VNYQ8-bF9Gs

Det Norske: 200% Upside Potential After Game-Changing Acquisition

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Summary

• Det Norske is well positioned to generate robust cash flows from a game-changing acquisition of Marathon Oil Norge AS.
• The complementary production profile of the company’s biggest assets ensures that funding is secured until first Johan Sverdrup oil in 2019.
• The valuation gap suggests a potential 200% upside with a 12-18 month time horizon.

(Editors' Note: Det Norske trades on the Oslo stock exchange under the ticker symbol DETNOR.OL, with ~18.5M NOK average daily volume).

Investment Summary

I had initiated coverage on Det Norske (OTC:DETNF) and Oslo- DETNOR on February 20, 2014. The stock moved sideways to lower since my initiation. However, in the last few weeks, the stock has surged by over 10%. The reason: A game-changing acquisition for the company.

In my initiation, I had discussed the funding concerns for the massive Johan Sverdrup development and potential asset sale to fund the development. The scenario completely changes with this acquisition. This re-initiation discusses the acquisition and why it is a game changer for the company. Given the current valuation, Det Norske is well set for a 100% upside.

The Acquisition

On June 2, 2014, Det Norske announced the acquisition of Marathon Oil Norge AS for a cash consideration of $2.1 billion. The cash consideration is based on a gross asset value of USD 2.7 billion and is adjusted for debt, net working capital and interest on the net purchase price.

While the acquisition is expected to close in the fourth quarter 2014, the effective date of the transaction is January 1, 2014. The positive impact of the acquisition was evident on the stock price with Det Norske surging by 9% on the day of acquisition announcement.

The Financing

For financing the acquisition, Det Norske has a fully committed and underwritten acquisition loan facility provided by BNP Paribas, DNB, Nordea and SEB. The company has also mandated and is in advanced discussions with the same four banks to finalise a seven-year Reserve Based Lending facility of $2.75 billion. This long-term facility will replace the acquisition loan and refinance Det Norske's current facilities.

Det Norske also intends to strengthen its equity base by issuing $500 million in new equity issue through a rights issue. The company's largest shareholder Aker Capital AS (OTC:AKAAF) has pre-committed to subscribe for its 49.99% pro rata share of the rights issue. Further, the remaining 50.01% is fully underwritten by a consortium of banks. In other words, the complete financing plan is largely secured.

Assets After Acquisition

Marathon Oil Norge AS, at the time of acquisition, had 136mmboe of proven and probable reserves. In addition, the company had 24mmboe of contingent resources and 80mmboe of potential upside in discoveries. Marathon Oil Norge had a 2013 net average production of 80,000boepd with revenue of $3.2 billion. In terms of acquisition price, Det Norske has paid $19.85 per barrel of oil equivalent considering a gross asset value of USD 2.7 billion.

For the combined entity, the proved and probable reserves as of December 2013 were 202mmboe with 60% of the combined reserves in production. Further, for the combined entity, the contingent resources are 101mmboe and the 2P and 2C reserves exclude the Johan Sverdrup development.

Among the acquired and producing assets, Alvheim field has 2P reserves of 93mmboe with more than 80% liquids. The production in the field is expected to last until 2031. The 2014 working interest production from the Alvheim field is expected to be 60,000boepd. The Volund field has 2P reserves of 14mmboe and production in the field is forecasted to last until 2025. The Vilje field has 2P reserves of 14mmboe with production until 2030. The Boyla field, which has reserves of 15mmboe, is expected to commence production in the first quarter of 2015. The gross plateau production from the field is expected to be 20,000boepd and the production is forecasted to last until 2030.

Among the existing assets (excluding Johan Sverdrup), Ivar Aasen has 2P reserves of 55mmboe, Gina Korg has 2P reserves of 7mmboe with other assets having 2P reserves of 3mmboe. The company's Ivar Aasen project is on schedule and the first oil from the project is expected in the fourth quarter of 2016. The company's share of production from Ivar Aasen is expected to be 16,000boepd with a plateau of 23,000boepd by 2019.

The Game Changer

I mentioned at the onset that the acquisition is a game changer for Det Norske. In summary, the acquisition and the financing discussed above ensure that Det Norske is fully funded for its Sverdrup development. In other words, the company will not need any additional external funding through 2019, when the first oil is expected from Johan Sverdrup.

The complementary production and cash flow profile for Det Norske and Marathon Oil Norge AS assets makes this acquisition an excellent and well timed deal. My point will be clear with the charts below.

The first chart gives Det Norske's standalone production profile.

It is clear that the next few years would have been associated with relatively low production. The first production bump-up comes when Ivar Aasen starts first oil by the first quarter of 2016. The second production bump-up comes when Johan Sverdrup starts production in 2019.

The issue with the standalone entity was the lack of internal funding available for investment in the massive Johan Sverdrup project. For the same reason, I had discussed in my initiation that the company is exploring some asset sale option.

The second chart below gives the production profile for Marathon Norge.

It is clear that Marathon Norge is at the peak production profile at this point of time. The company's production in 2013 averaged 80,000boepd. For 2014, the production is expected marginally lower at 60,000boepd.

The most critical point here is that the complementary production profile ensures that Det Norske, as a combined entity, produces robust cash flow from 2014. The chart below gives the production profile of the combined entity.

The company's management expects that the cash flow from Marathon Oil Norge production, cash flow from Ivar Aasen and the recent financing will be sufficient to fund all the investment needed for Johan Sverdrup until 2019.

Another positive related to the acquisition is the prior to Marathon Norge; Det Norske was not in a tax paying position. Consequently, all the investments had to be funded on a pre-tax basis and the company was building up significant tax losses.

These tax losses could not be offset against revenue before Johan Sverdrup came on stream in 2019. After the transaction, the company can offset the tax against fields in production from day one. In other words, the use of tax benefits shifts to 2014 from an earlier expected date of 2019. While this is one of the side advantages, it was important to mention as it underscores the excellent timing of the acquisition.

Revenue Projections For 2014 and 2015

For the first quarter of 2014, Det Norske reported revenue of $27 million and a negative EBITDA of $2 million. This section discusses the revenue outlook for the remainder of 2014 and the revenue for 2015. The objective is to determine the kind of EBITDA and potential operating cash flow for Det Norske after the acquisition.

For the first quarter of 2014, Marathon Oil Norge AS reported an average production of 69,000boepd. The production in 1Q14 was negatively impacted by severe winter weather which resulted in eight days of curtailed production.

Therefore, for the remainder of 2014, my assumption is a marginally higher production of 72,000boepd. Det Norske (standalone) reported an average production of 2,895boepd in 1Q14. I have assumed production to remain at the same level for the remainder of 2014. In other words, the expected production for the remainder of 2014 is likely to be 74,895boepd. The projections for 2014 are considering this production level and a sales price of $106 per barrel (current crude oil price).

Marathon Oil Norge AS reported an EBITDA margin of 87% for the year ended December 2013. I have assumed the same EBITDA margin for 2014E. Also, Marathon Oil (MRO) reported an EBITDA cash conversion ratio of 74% for 1Q14 and I have assumed the same conversion ratio for operating cash flow calculation.

Therefore, with the acquisition, Det Norske is likely to generate an operating cash flow of nearly $1.4 billion for 2014. Strong operating cash flows will help fund the massive investment plan for Johan Sverdrup.

For 2015, the production upside will come from the Boyla field, which is expected to commence production in the first quarter. Considering a gross production of 20,000boepd from the field, the company's share of production comes to 13,000boepd for a 65% stake.

For my assumptions, I have considered production from other fields to remain stable at 72,000boepd and a production of 13,000boepd from the second quarter of 2015 from the Boyla field. Also, the EBITDA margin and EBITDA cash conversion ratio have been assumed to be the same as 2014. The sales have also been considered to be executed at a current oil price of $106 per barrel. With these assumptions, the revenue, EBITDA and cash flow outlook is as below.

The revenue, EBITDA and operating cash flow is likely to be $3.2 billion, $2.7 billion and $2.0 billion respectively for 2015E. Even for 2016 and 2017, the production bump-up will come from the rich Ivar Aasen field. The point I want to stress is that Det Norske will transform from a no cash generating position to a point where the company increases its revenue annually and also generates robust operating cash flows.

Johan Sverdrup Revisited

In my initiation on Det Norske, the capital expenditure funding for Johan Sverdrup was not certain and the asset value was therefore not completely discounted in the stock. I would again like to discuss Johan Sverdrup at a time when the funding is certain until first oil in 2019. I believe that the stock will discount the asset value, especially when the plan for development and operations, scheduled to be delivered in early 2015. This will be another significant stock upside trigger for Det Norske.

Johan Sverdrup was the biggest oil discovery in the world in 2011 and the biggest in Norway in decades. Det Norske holds stake in 2 licenses in Johan Sverdrup with the company holding a 20% stake in PL265, which is estimated to have gross contingent resources in the range of 900mmboe to 1,500mmboe.

Considering an average resource of 1,200mmboe, Det Norske's share in the license would come to 240mmboe. Det Norske also has a 20% stake in the PL502 license. The reserves in this stake are not significant as PL265 and PL501 are the main licenses. In order to have a conservative estimate, I would peg the total reserves from both the licenses at 250mmboe. The positive factor to mention here is that Statoil has recently announced that oil recovery of 70% is achievable in Johan Sverdrup. Higher oil recovery is likely to boost the asset valuation.

As mentioned in my initiation coverage, Lundin Petroleum (OTCPK:LNDNF), which also has stake in Johan Sverdrup, believes that the current transaction value for Johan Sverdrup should be in the range of $10/boe. This would peg the value of Det Norske's share of reserves at $2.5 billion in contrast to the company's current market capitalization of $1.7 billion and implies a stock upside of 56% from current levels.

Valuations

I consider Lundin Petroleum to be the best peer for Det Norske. The reason being that Lundin Petroleum also holds stake is the giant Johan Sverdrup field. The key difference between the two companies was the fact that Lundin expects significant cash flows from current developments to finance its investment in Johan Sverdrup. On the other hand, Det Norske was struggling to find a way to fund the Johan Sverdrup development.

With the acquisition, Lundin Petroleum and Det Norske are at par when it comes to financing Johan Sverdrup and Det Norske's forward valuation should catch up with Lundin Petroleum's valuation.

I had initiated Lundin Petroleum in one of my earlier articles and taking the 2015E EBITDA (revised for current oil prices), the stock is currently trading at an EV/EBITDA valuation of 4.8. On the other hand, Det Norske is trading at an EV/EBITDA (2015E) valuation of 1.6.

This implies a valuation gap of 200% and I strongly believe that Det Norske has this upside potential after the game-changing acquisition. I must mention here that I have incorporated the $2.7 billion acquisition debt and the planned $500 million equity offering by Det Norske in the calculation of EV. This largely incorporates the factors related to the acquisition.

Risk Factors

With high 2P reserves after the acquisition and a stable production profile, the risk related to immediate developments in the company is minimal. Of the current 2P reserves, 60% are in production and this ensures strong operating cash flow for the company over the next few years. The offsetting factor to strong cash flows can be a decline in oil prices.

For the forecast, I have assumed crude oil price of $106. Any decline in prices can negatively impact cash flows and also potentially delay the development of Johan Sverdrup. I however believe that a decline in oil prices is unlikely considering the supply constraints that might arise from prevailing tensions in the Middle-East. From that perspective, the company is operating in a safe-zone when it comes to geo-political risks.

Conclusion

The $2.7 billion acquisition of Marathon Oil Norge AS completely changes the scenario for Det Norske in terms of funding and growth. The acquisition complements the company's production profile and provides robust cash inflow until 2019. Just over the next two years, a potential cash inflow of $3.4 billion is likely.

Det Norske stock was depressed prior to this news as there were big funding concerns. On the day of acquisition announcement, the stock jumped by over 9%. This is just the beginning of a long-term rally for the company and I believe that the valuation gap will be filled over the next 12-18 months. During this time period, the company will be generating strong cash flows and the plan for development and operations for Johan Sverdrup will also be in place. Det Norske is a "Very Strong Buy" at current levels.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks

ByStreet Smart Investor

Source:http://seekingalpha.com/article/2269653-det-norske-200-percent-upside-potential-after-game-changing-acquisition

Baidu: A Wide-Moat Business With 40% Upside Potential

|  44 comments |  About: BIDU, Includes: AMAP, GOOG, GOOGL, QIHU, QUNR, YOKU

Disclosure: I am long BIDU. (More...)

Summary

• Baidu will maintain its leading position in PC search and extend its leadership into the mobile search business.
• Mobile payments, map services, online video and app distribution will be key revenue and earnings growth drivers in coming years.
• Stock is trading at a 40% discount to fair value; ramping margins could be a long-term catalyst.

Baidu's (BIDU) core search engine business is expected to continue delivering solid revenue growth over the next several years, largely driven by China's rising Internet user base. Baidu recently entered the mobile segment by providing mobile payments, map services, online video and apps. These initiatives are not yet generating meaningful revenue, but I believe they will become long-term revenue growth drivers on the back of rising demand for mobile services.

Even with Baidu shares up more than 80% over the last 12 months, the stock is still trading at a substantial discount to its Internet peers. I believe this is unjustified given the company's robust growth, ramping margins and wide economic moat. Taking these factors into account, I believe Baidu is one of the best investment opportunities of 2014.

Business Overview

Baidu is the dominant Chinese search engine, with over 70% market share, and the second-largest search engine in the world behind Google (GOOG,GOOGL). The Baidu.com website is the most trafficked website in China, and the "Baidu" brand is ranked as the most valuable Internet brand in China. The company generates revenues primarily from pay-for-performance advertising ("P4P"). Its P4P platform helps connect millions of Internet search users to its more than 753,000 marketing customers who pay it a fee based on click-throughs for priority placement of their links in the search results. Baidu was founded in 2000, and listed on the Nasdaq in 2005.

Baidu Benefits From a Tremendous Network Effect

Baidu is the dominant Internet search engine in China, with over 70% search market share as of 1Q14. Some investors have been concerned that Baidu will eventually lose its market share advantage to competitors such as Qihoo 360 (QIHU) and Sogou (including Soso). Although rising competition is a risk one should consider, I still believe Baidu will remain the dominant Chinese search engine going forward, because the company benefits from a tremendous "network effect."

Figure 1: Baidu's Total Search Market Share (PC + Mobile)

Note: This market share estimate is an average based on various sources.

Source: M&E Research, Analysys International, iResearch, CNZZ and EnfoDesk

Baidu ended 2013 with more than 753,000 marketing customers, making it the largest Internet search engine in China by some distance. This customer base has grown at an impressive 41% per annum between 2003 and 2013, and will likely continue growing at double-digit rates for the foreseeable future. More customers have led to more information on Baidu's online platforms, and consequently, attract more search engine users. This creates a self-reinforcing network effect that is very difficult for its competitors to replicate, since it takes a fairly long time for other companies to achieve a user base of similar size. Moreover, millions of Internet users rely on Baidu's dominant online platform to connect with each other and share information and knowledge. It is highly unlikely for users to give up the massive network and information source by switching away from Baidu.

I believe the increasing Internet penetration in China will help widen Baidu's economic moat over time. First-time Internet users are more likely to choose Baidu as their preferred search engine, simply due to the fact that it is probably the one they are most familiar with. In my opinion, this gives Baidu an enormous competitive advantage. The Internet penetration rate in China has increased steadily from 6% in 2003 to just below 46% in 2013. However, this penetration rate is still low compared to developed countries. The Unites States, for example, has a penetration rate of nearly 80%. Over the long term, the growth in the number of Internet users in China will contribute toward the growth in the number of Baidu users. I believe this will further strengthen the company's network effect and widen its economic moat.

Figure 2: Internet Penetration Rate in China

Source: M&E Research and CNNIC

Mobile Business Will Be a Long-Term Growth Driver

The number of mobile Internet users in China has grown at 47% per annum between 2007 and 2013, and reached 500 million by the end of 2013. Still, considering China has a population of over 1.3 billion, this represents a mobile Internet penetration rate of only 37%. Although, with the continued rapid adoption of mobile devices in China, the number of mobile Internet users is likely to see further growth in coming years.

Figure 3: Mobile Internet Penetration Rate in China

Source: M&E Research and CNNIC

I believe Baidu is the strongest-positioned to benefit from the fast-growing mobile search market. According to the 2013 survey on "Internet User Search Behavior" by CNNIC, over 89% of mobile Internet users in China picked Baidu as their favorite mobile search engine, dwarfing its main competitors Qihoo 360 and Sogou (including Soso). This suggests that Baidu's mobile search will eventually achieve success similar to its PC search business.