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Baidu (NASDAQ: BIDU) always has been a very small company compared to Google (NASDAQ: GOOG), although by some estimates it has 80% of the huge China search market. Baidu met analyst estimates for its first quarter, but forecasts were so poor, the company’s stock dropped 10%. While China may have 700 million people online, that does not mean the search engine model that has been such a success in the United States and Europe will be a similar success in the People’s Republic. Internet use patterns in China actually may be different.

Baidu’s revenue rose 75% in the first quarter to $677 million. Net income was up 76% to $299 million. The Chinese search company predicted second-quarter revenues would range from RMB5.335 billion ($847.2 million) and RMB5.460 billion ($867.0 million). That would represent a 56.2% to 59.9% year-over-year increase. But, on a quarterly sequential basis, the improvement is as little as 25%.

U.S. analysts who follow Baidu, primarily because it trades on Nasdaq, expect that Baidu should become nearly as big as Google is in America. But China’s Internet habits are different, based on a host of reasons. Perhaps the most important one is the careful eye that the central government keeps on Internet activity. Each search made can be a signal of the searcher’s intentions. In China, those intentions may be viewed as more than innocent. There was some evidence of that the government cancelled a number of “Twitter-like” Weibos posts and closed some accounts entirely because of “rumors” spread about disgraced government official Bo Xilai.

China has censored some Google results for years, because of fear that people who use Google might research subjects forbidden by the government.

It is also possible that search is not considered as useful a tool in China as in the U.S. There is less news to search. China is likely to allow fewer products to be searched for e-commerce. A typical Chinese resident has limited disposable income. The reasons for modest search activity may not be entirely explainable to analysts outside China, but there is some evidence from the size of Baidu’s revenue that the Internet is used in a manner different than in the U.S.

Baidu may never be a large company. That would make its current market cap much too large. That assumptions about Baidu’s value could turn out to be worthless.

Douglas A. McIntyre