Baidu: Just Like Google In 2004

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 most frequently visited website in China, has grown by leaps and bounds since going public in 2005, from a split-adjusted $2.70 per share to the current level of around $110.  Shareholders who got in from the beginning are sitting on gains of almost 4000%.  To put this in perspective, if you had invested $10,000 in Baidu in 2005, your initial investment would be worth over $406,000 today. 

Of course, anytime a stock has this kind of upside move, investors are faced with a tough decision: sell or hold?  While I definitely agree that in cases like this it would be foolish to not take at least some of your profits off of the table, I believe Baidu still has a whole lot of room to run. 

Comparing search engine stocks
Since Baidu is often referred to as the Google (NASDAQ: GOOG) of China, let’s compare the two.  Unlike Baidu, Google did not go public until much later in its development.  Even though Google’s share price has increased tenfold since its IPO in 2004, at that point it was already a well-established company, with positive earnings that showed clear signs of growth (see below).  Additionally, at the time of the IPO, Google already had accumulated almost $8 billion in cash.

<img src="/media/images/user_14267/goog-eps-chart_1_large.png" />

In contrast, at the time of its IPO, Baidu had barely begun to generate a profit, and its earnings showed no clear signs of growth (see below – note the extended flat area on the chart).  In other words, Baidu was very much still a speculative play when it went public.  The company had never earned more than one penny per share; it had only $112 million in cash; and most significantly, it only had $13.4 million in revenue the year before.  In this respect, buying into the Baidu IPO was analogous to getting into Google about four years before its IPO. 

<img src="/media/images/user_14267/bidu-earnings_large.png" />

In terms of revenue, Baidu has only begun to tap into the vast potential in its market.  China’s internet search market is growing rapidly, having grown by 61% during 2011 alone. This is similar to the growth seen in the U.S. in the late 1990’s. With the company due to report earnings on Feb. 4, pay specific attention to last year’s growth, as I expect this trend to continue for the foreseeable future.

The earnings ahead
Baidu is on track to produce revenues of around $3.4 billion for 2012, a 53% jump from 2011.  To put the growth potential here in perspective, Google just reported $50.2 billion in revenue for 2012, and they are still growing revenues at a double-digit rate, meaning they still have unrealized potential.  With the rapid emergence of China’s middle class, there is no telling how many internet users there will be in 10 years. 

Another positive statistic for Baidu is their dominating 79% market share in the online search segment in China.  Google is close to 70% of the U.S. market, meaning Baidu dominates their respective market even more than Google does.  The next closest competitor behind Baidu and Google (who has about 16% of the search market in China) is (NASDAQ: SOHU) which is a distant threat at best, with a market capitalization of about 8% of Baidu’s.  Sohu only has a search market share of about 2.9%, but makes most of its revenue from gaming and other ventures such as online media.  Although Sohu has been ranked as one of the fastest growing companies in the world (peaking at No. 3 in 2009), it may indeed work as an investment due to its other operations, but I don't see it capturing a significant search market share in China.

With a population of 1.3 billion and growing, if the uptrend in disposable income among Chinese comsumers continues, the sky is the limit.  According to consensus estimates, Baidu is expected to report earnings of $4.77 for 2012, up from $3.02 last year.  Furthermore, they are expected to grow this to $5.94 and $7.42 in 2013 and 2014, respectively, estimates that I believe to be very conservative and could be revised upward significantly if the data reported next week is good.

Why you might want to buy Baidu
In conclusion, although Baidu has performed amazingly well for its shareholders, don’t let that fact scare you away from investing in this company now.  While it is true that the speculative phase (and its subsequent rewards) may be over, as Baidu has established a clear pattern of earnings growth, I believe the realization of this company’s true potential is just getting started. 

How would you have liked to invest in Google when its revenues were only in the $3 billion range?  What about when only 40% of the U.S. population had access to the internet, as is the case in China now? I believe that you can still do so with the “Google of China” -- Baidu.

KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Baidu, Google, and 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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