By Paul Carsten and Lee Chyen Yee
BEIJING/SINGAPORE (Reuters) - Revenues from Baidu Inc's mobile services surpassed 10 percent of its quarterly total for the first time in the April-June period, dispelling fears that China's largest Internet search was losing market share to rivals.
Baidu has invested in location-based services, apps and online videos to make money off smartphone users as it looks to diversify its revenue stream and fend off increasingly stiff competition in the search market from rivals like Qihoo 360 Technology Co Ltd.
Investors had not expected these investments to boost revenues so soon, analysts said.
"Baidu said they were monetizing... but that was something the Street didn't factor in for the second quarter and especially for the third quarter," said Michael Clendenin, managing director of China-based advisory firm RedTech Advisors.
Baidu shares rose 12 percent in after-hours trade after it surprised investors with a higher-than-expected revenue forecast of $1.422 billion to $1.46 billion in the third quarter. Its second quarter revenues rose 28 percent from the previous quarter to $1.23 billion, in line with expectations.
"Our investments in mobile are already beginning to bear fruit," Baidu's Chief Financial Officer Jennifer Li told an analysts' briefing. "Mobile revenue for the first time accounts for over 10 percent of total revenue."
The company declined to disclose the percentage of its first-quarter revenues that came from mobile services.
China's mobile Internet market is expected to double to about 300 billion yuan ($48 billion) in 2014 from 150 billion yuan in 2012, with the number of active mobile Internet users rising to 749 million from 521 million during the same period, according to research firm Analysys International.
The growth potential in the mobile market has boosted total acquisitions, inclusive of net debt, in China's Internet sector to $1.6 billion so far this year, which is more than the $1.1 billion in the whole of 2012 and $900 million in 2011, according to Thomson Reuters data.
Potential targets like Sohu.com Inc, Kingsoft Corp Ltd, Jiayuan.com International Ltd and Ctrip.com International Ltd are also enjoying a boost to their valuations.
The average twelve-month forward price-to-earnings ratio for the four companies was 24.35, compared to the Chinese Internet sector's average of 19.24, Thomson Reuters data showed.
Last week, Baidu said it would buy app store 91 Wireless for $1.9 billion from NetDragon Websoft Inc and other shareholders. [ID:nL4N0FM0V5] In May, it said it would buy the online video business of PPS Net TV for $370 million.
Chinese rivals Tencent Holdings Ltd and Alibaba Group are also investing to stimulate revenue growth.
Tencent is eyeing Western game developers to create games for its popular WeChat app, said Steve Grey, an executive in charge of game production.
Alibaba this year bought stakes in Sina Corp's social-networking website Weibo and in navigation and maps firm AutoNavi Holdings Ltd. Qihoo 360, which also has an app store, is in talks to acquire Sohu's search engine in a deal that could give it almost one quarter of China's search market.
"They're all moving in the same direction, but on mobile they don't know what the proven business model is," said Elinor Leung, an analyst at brokerage CLSA. "So the way to do it is do everything and see which works out eventually."
The rush to expand into mobile means some companies may be overpaying for acquisitions, RedTech Advisors' Clendenin said.
He estimates Alibaba paid ten to eleven times Sina Weibo's projected 2014 sales for its share while the cost to Baidu could be 18 to 19 times the projected sales of 91 Wireless.
"With Baidu there wasn't really much left on the table. I think NetDragon knew they had an advantage," Clendenin said.
"They were one of the few girls left at the dance willing to go out with Baidu."
(Corrects paragraph 5 from shares closing 11 percent higher to shares rising 12 percent in after-hours trade)
(Additional reporting by Pete Sweeney in Shanghai; Editing by Miral Fahmy)