Has Baidu Risen Too Far Too Fast?

By Ryan Guenette - August 28, 2012 | Tickers: BIDU, GOOG, SINA, SOHU, YNDX | 0 Comments

• Email
• Print

After going public in 2005, Baidu.com Incorporated (NASDAQ: BIDU) quickly began its move upward. Rising 993.36% since its initial public offering, Baidu has been labeled as “one of the greatest growth stories of our time” and “the Google of China”. After making an all-time high in the $150 area, the stock has puttered along, ending a significant multi-year trend of drastic upward moves. As the company matures at its lofty levels, it retains a strong hold on one of the fastest growing markets in the world, China. Baidu’s earnings reports have continued to reaffirm the company’s underlying strength, yet the euphoria surrounding the company has died off, prompting the stock to become stuck in a downward channel. The stock’s recent action has prompted a question, has Baidu made it’s ascent too far too fast?

Incredible Fundamentals

In 2008, Baidu.com reported earnings per share of $0.44. In 2013, the average analyst consensus believes the company will derive $6.45 from its business operations. This represents an increase of 1,365.91% over 5 short years, an incredible feat for any company of any size in any industry. Based on these statistics, the company’s compound annual growth rate (CAGR) is 71.09%, an astonishing achievement. Baidu is set to grow not only from a growing pool of customers, but also from a gain in market share, as it only possesses about 75% of the search market industry in China, at the current moment. The company may also find growth by entering new markets, such as Google has done. By continuing to innovate their services and remaining the king of search engines in China, Baidu will continue to grow a sizeable rate. At the current moment, Baidu does not pay out an annual dividend, and expressed no plans to do so in the future. From this we can see Baidu’s impressive growth prospects which should continue into the future.

The chart below displays earnings per share and sales over the foreseeable future.

Growth Prospects into the Future

China is the largest internet market in the world, and Baidu has a firm grasp on the search engine of the region. Baidu is able to monopolize on the industry, and not face competition from companies such as Google, because of the Chinese Government’s interventions. Google would never allow the Chinese government to delete and distort their search engine, but Baidu allows it. This allows them to benefit from one of the fastest growing industries in the world. From 2007 to 2011, the amount of Chinese internet users increased 144.29%, as the chart below displays.

Additionally, Baidu is heavily invested in the mobile growth story enveloping China. The growth curve in predicted Chinese smartphone users is even steeper than overall internet users. Baidu is perfectly positioned to take advantage of the fundamental shift to mobile, and will not be left out in the cold. The chart below displays the estimated amount of Chinese smartphone users.

In conclusion, Baidu has a monopoly on the Chinese internet industry, and is perfectly positioned to continue to capitalize on this growing industry.

Who Has Tamed The Red Dragon?

Compared to some of Baidu’s largest competitors, such as: Google Incorporated (NASDAQ: GOOG), SINA Corporation (NASDAQ: SINA), Yandex NV (NASDAQ: YNDX), and Sohu.com Incorporated (NASDAQ: SOHU), Baidu relatives moderately favorably.

In terms of growth, Baidu is unmatched, while SINA appears to be the biggest laggard in the sector. No companies in the sector pay out dividends, and none have expressed any plans to do so in the coming future. In the fundamental ratio comparison, Baidu appears to be trading at a premium, while SINA trades at a discount. When growth is taken into account, the exact opposite is true, with Baidu appearing to be the bargain, and SINA looking overpriced. In the net profit margin comparison, Baidu stands out to the upside, while SINA stands out to the upside.

The Foolish Bottom Line

The Chinese internet market is one of the fastest growing industries in the world, and Baidu has a monopoly on the search engine side of it. In the recent months Baidu has been stuck in a downward channel, despite its tremendous financial strength. Baidu has a tremendous growth profile and a rock-solid plan to continue its reign as the number one search engine in China. While there may be concerns over the multiples Baidu is valued at, if the company can deliver growth even near what it has accomplished in the past, in a couple of years the stock will seem cheap at current levels. The foolish bottom line is that Baidu is a tremendous play on the China growth story, and the recent pullback in shares will be seen as a buying opportunity in the future years.   

• Email
• Print
• Feedback