39% Growth and Cheap Valuation

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

Baidu (NASDAQ: BIDU), the leading provider of Chinese language online search services has had an incredible run since its IPO in August 2005, from a 2005 split-adjusted low of $2.70 to an all-time high of $165.96 in 2011.  With the stock currently trading just over $100 as of this writing, are Baidu’s glory days behind them, or is there more growth ahead?

 

First, a little background on the company:  The company’s website is the most visited in China and the 5th most visited in the world, according to alexa.com.  BIDU is often referred to as the “Google (NASDAQ: GOOG) of China.”  Just like Google, Baidu makes its money primarily from advertising revenues, with about 352,000 active customers as of June 2012. 

Baidu has very little direct competition in China.  The Chinese internet search market grew 61% in FY 2011 and Baidu holds a 79% share of the market.  Google is a distant second with a 16% share, and the rest of the competition comprises only 5% of the total market.  Baidu should be able to at least maintain its share of this growing market, or perhaps even increase it.  Their brand is extremely well known and respected, and their management is top-notch. 

BIDU currently trades at 21 times 2012’s earnings of $4.81 per share, with revenues expected to grow an additional 44% in 2013, there is still tremendous growth anticipated in this industry.  Analysts at Standard and Poor’s expect BIDU to grow its earnings at an average annual rate of 39% for the next three years.  This means that BIDU is trading at only 15.8 times 2013’s projected earnings, 13.39 times 2014’s earnings, and only 9.6 times 2015’s earnings.  Although it has grown rapidly over the past 7 years or so, Baidu still only has a market cap of around $26.5 billion, which is extremely low for the leading search engine in the most populated country in the world.  To put that in perspective, Google has a market cap of around $190 billion.

When compared with the competition, it is even more apparent just how cheap Baidu is.  For example, as we mentioned before, Google is Baidu’s closest competitor.  Google is currently projected to grow its earnings at a 16% rate, considerably slower than Baidu.  However, Google trades at a 22 times TTM earnings multiple, almost exactly the same. While it’s true that Google has about $45 billion in cash on hand, even when backing that out of the equation, the company still trades at 16.8 times TTM earnings.  Point being, I don’t think Baidu’s valuation is high enough, given its enormous growth rate.

Analysts tend to agree, with an average 1-year target price on BIDU of $140.45, which is a 39% upside over current levels, and some target prices are as high as $160.  Standard and Poors even used Google’s P/E in relation to its growth when developing their forecast.  Google, by the way, is seen as much more fairly valued, with a consensus price target only 10% over current levels.  I tend to believe that this is a great opportunity to get into the leading internet company in the fastest-growing economy in the world for a deep discount.

 


KWMatt82 has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu and Google. Motley Fool newsletter services recommend 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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