Baidu: Persistent Search for the Ideal
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In case you aren't aware, and I can count myself as one who was not aware, Baidu the name literally means, “persistent search for the ideal.” If you're looking for the ideal stock, I would make the suggestion, search no more, Baidu (NASDAQ: BIDU) is it.
If I had to describe the perfect company, I would look for at least 20% growth in both top and bottom line numbers. I would also want to see dominance in its industry. The company would have plenty of room to grow, and a good balance sheet. I would also like to see good cash flow, the company beating earnings estimates, and estimates being raised. Let's see how Baidu does in these categories. I'm asking a lot, but I think Baidu is up to the challenge.
20%+ Growth in Revenues and Earnings
Baidu's revenue growth rate is nothing less than astonishing. The company's revenue growth has actually accelerated in the last three years. Two years ago, revenue growth was 84%, last year it was 92%. Those are unbelievable numbers, but what's next? Analysts are calling for 59.10% revenue growth in 2012 and 41.70% revenue growth in 2013. The amazing part is, even at the end of 2013 if the company meets revenue estimates, Baidu would show just over $5 billion in revenues. Contrast that to Google (NASDAQ: GOOG), which is expected to have revenues of $42.28 billion in 2013 and you can see there is plenty of room for Baidu to grow. When it comes to earnings, Baidu shows growth in the last two years of 146% and 97%, respectively. Analysts expect earnings growth of over 43% in the next five years. I would say that Baidu exceeds my expectations for growth by a wide margin. (20%+ growth – Pass)
Dominance in its Industry
As of the most recent statistics Baidu has somewhere around a 77% market share of China's search market. I would compare this to the roughly 66% market share of the U.S. search market that Google holds. Even more impressive is that Baidu's market share has grown mainly at the expense of Google. I don't think there is any question that Baidu dominates its primary business, which is search in China. (Dominance in industry? - Pass)
Plenty of Room to Grow
While it's great that Baidu currently dominates its industry, the company needs opportunities in order to maintain good earnings growth. By the end of last year, China's total Internet penetration had grown to 38.3%. The comparison to the U.S. again is useful, considering that over 78% of the U.S. has access to the Internet. With an estimated 1.3 billion people in China, if the same 78% penetration rate were achieved, this would represent an additional 500 million that would have Internet access. With mid-single digit growth in users, it will take years for China to near the current 78% penetration rate of the U.S. As an example, at a 5% growth rate it would take a full 15 years or more to reach this goal. Clearly there is plenty of room for growth just inside of China, this doesn't take into account any growth possible outside of the mainland. (Plenty of room to grow - Pass)
Good Balance Sheet
More losses are recorded from not understanding corporate balance sheets (according to one of the greatest investors of all time, Peter Lynch). Baidu's balance sheet carried almost no long-term debt just a few years ago. Today, the company does have some long-term debt, but it is more than offset by cash and investments. Baidu's balance sheet can be summed up best with one phrase, $2 billion net cash. (Good balance sheet – Pass)
Good Cash Flow
Baidu shows huge free cash flow growth in each of the last few years. As of year end 2011, the company showed over $1 billion in free cash flow, nearly quadruple the company's free cash flow from 2009. This sounds impressive, but I like to compare companies' free cash flow based on their asset size. In theory, the company that makes the most out of each dollar of assets is the most efficient operator. Baidu generated $0.27 of free cash flow per $1 of assets in the last year. Google generated $0.15 of free cash flow per $1 of assets in 2011, and Sohu.com (NASDAQ: SOHU) generated $0.12 of free cash flow using the same metric. Baidu is generating nearly twice what Google generates with its assets, and 125% more than mainland competitor Sohu. (Good cash flow - Pass)
Beating Earnings Estimates & Estimates Being Raised
Baidu has a good history of beating earnings estimates. In the last four quarters, the company beat estimates all four times. Analysts have noticed this propensity for beating their expectations, and have raised both 2012 and 2013 estimates twice in the last 90 days. (Beating expectations – Pass)
You can probably see why I say that Baidu might be the perfect stock. The tests that we've put the company through are not easy to pass, and Baidu passed 6 of the 6 tests. Add Baidu to your Watchlist and keep up with developments of this “ideal” company.
Motley Fool newsletter services recommend Baidu, Google, and Sohu.com. The Motley Fool owns shares of Google. MHenage owns shares of Baidu. 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.