Is Baidu a Good Stock to Buy?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Concerns over the Chinese economy and a pattern of accounting irregularities at Chinese companies have caused declines in a number of Chinese stocks in the last year. Baidu (NASDAQ: BIDU), a leading search engine and Web portal in the country, has fallen 38%. This has occurred despite strong growth at the company: Baidu reported that in the fourth quarter of 2012 its revenues increased 42% versus a year earlier, and earnings grew 36%. At a market capitalization of a little under $30 billion, the stock now sits at 18 times trailing earnings, which we at Insider Monkey generally associate with much lower growth rates than the business has been reporting recently.

From the perspective of Wall Street analysts, there does not seem to be much expectation of growth halting in the medium term future, judging by the fact that consensus earnings estimates imply a forward P/E of 12 and a five-year PEG ratio of 0.6. We certainly could see Baidu’s growth slowing--sustaining 40% growth rates would be very difficult--but we don’t think that any deceleration would be abrupt and certainly think the company should continue to report double-digit growth rates for some time, in contrast with where it currently trades. Even if the Chinese economy does deteriorate, we are skeptical that it would so quickly cut the business’s growth out from under it.

Billionaire Ken Fisher’s Fisher Asset Management reported a position of 1.9 million shares in Baidu as of the end of December, a slight increase from the beginning of October. Tiger Global Management, a Tiger Cub hedge fund which is a major investor in many tech stocks, had 2.2 million shares in its own portfolio. William Gray’s Orbis Investment Management was a heavy buyer of Baidu during the fourth quarter of 2012, increasing its stake by 75% to a total of 5.7 million shares. We pay attention to hedge fund positions because our research has shown that imitating hedge funds' top stock picks generally outperformed the market.

Other Chinese Internet portals include Sina Corp (NASDAQ: SINA) and (NASDAQ: SOHU). These two peers have also seen their stock prices decline in the last year, and interestingly their net income was actually down last quarter compared to the fourth quarter of 2011. In addition, their earnings multiples are generally higher than what we find at Baidu. In the case of Sohu the gap is fairly small (trailing and forward P/Es of 23 and 13, respectively), but Sina trades at a much larger premium, with its valuation coming in at 30 times analyst consensus for 2014. So if we take all three companies’ financials at face value Baidu appears to be a much better buy.

We can also compare Baidu to Google (NASDAQ: GOOG) and Russian search engine and Web portal Yandex (NASDAQ: YNDX). Google trades at a premium to Baidu, at 25 times trailing earnings, though in that company’s case we have the potential upside from better integrating Motorola Mobility Holdings. Thus far Google’s earnings growth has been only modest and driven by search and other advertising products, but the tablet and smartphone market could well be a source of strong growth. The company’s forward P/E of 15 is more in-line with Baidu. Yandex, meanwhile, carries a trailing earnings multiple of 29. It too is reporting very strong growth, with revenue up 37% and earnings rising 27% in its most recent quarter compared to the same period in the previous year, but at least in quantitative terms that falls short of the apparently cheaper Baidu.

Of course many investors will avoid Chinese stocks on the fraud issue for some time. Baidu does look more attractive than its fellow Chinese Internet companies, and certainly the reported growth rates would make it the best buy of its peer group. Google does look competitive if we assume that business to have higher quality earnings, though we would prefer to see the company achieve higher earnings growth considering its current valuation.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in Google. The Motley Fool recommends Baidu, Google, SINA ,, and Yandex. The Motley Fool owns shares of Baidu and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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