Baidu: Is Now the Best Time to Get In?
Maxwell 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), China's largest internet search engine, is often thought of as the East's version of Google (NASDAQ: GOOG). Fair or not, with this sort of analogy comes expectations. Baidu came through with an outstanding earnings report, but butting up against absurdly optimistic current and future expectations, Baidu stock was hammered.
In its first quarter of 2012, Baidu posted earnings of $299 million $0.87 per share. It beat analysts’ expectations of $0.84 per share, and also represented a 76% jump from the year ago quarter. Revenues in the quarter were $677 million, or a 75% jump from the year earlier. That revenue total matched analysts' expectations. On top of these ridiculously positive actual results, Baidu stock dropped 12%. What the heck happened?
We are not talking about a company with anywhere close to universal market penetration in its home market. The Chinese market has four times the population of the United States, after all, and Google pulled out of the market in protest of censorship. Baidu's market capitalization is north of $40 billion, but that is only because shares have been bid up to a price to earnings ratio of 45. On the other hand, it has a current, five year estimated PEG of 0.70, indicating even at this extreme a price to earnings ratio, Baidu is undervalued.
The big news accounting for the dismal stock performance is that management's revenue guidance for the second quarter of 2012 was disclosed at between $847 million and $867 million. Wall Street had been expecting second quarter revenue of $869 million. Even management's “disappointing” revenue forecast would be a 60+% revenue growth from the second quarter of 2011. Is a forecast miss of less than one percent worth $5.6 billion of lost market capitalization wealth? It is nothing more than market hysteria run amok. Then again, with the company selling at such a rich price to earnings ratio, any reason for disappointment will be exacerbated.
Baidu is working hard to become more than just a search engine. It is currently in talks with Finland based Rovio to distribute the ubiquitous Angry Birds franchise. But it is its core business, and its affiliation in that business with hundreds of business partners, that promise to drive growth in the future. With a virtually unlimited market, and a clean balance sheet, Baidu will only be limited by any future economic woes in China. To me, that seems a fairly remote risk. Baidu should be able to keep up its generous growth rates for several years to come, and I do not believe it is too late to jump aboard the Baidu bandwagon for growth investors. Look at the huge sell off as a buying invitation.
Investing in Chinese companies can be inherently different than investing in the United States. Government policies, such as the recent lowering of capital requirement for its banks, sound absurd to us, and companies that list in New York can run afoul of our more regulated financial culture. SinoTech (CTESY.PK) was recently sued by the SEC for overstating asset valuations at the time of its initial public offering in New York. Sino-Forest is not only in bankruptcy, but is being sued by activist investors for accounting fraud. Maybe Chinese companies aren't so different after all. But of the many such companies that are available here, I like Baidu the best among internet companies, although Renren (NYSE: RENN) and China Telecom (NYSE: CHA) are also worth close looks.
If Baidu is the Chinese language Google, then Renren is the Chinese language Facebook. But as pervasive as Facebook is throughout much of the world, Renren has scarcely penetrated its home market. Renren's big problem to me is that it is not yet profitable. It lost three cents a share in 2011, and is forecast to lose ten cents per share this year, and four cents a share in 2013. Its home market is scheduled for gross domestic product growth of 8%, impressive to be sure, but still less than the recent 10% rate of expansion. This perceived slowing is weighing on all Chinese stocks, and anything more substantial of a slowdown in China would have impacts on world markets. I am not interested in American internet companies that have no history of profitability, like Groupon. I don't see any reason to invest in a foreign company when the same features are here, less corrupt, and more transparent.
On the other hand, I believe China Telecom does have things to offer that no company here does. China Telecom is an integrated communications and technology company, offering wireline, wireless, and internet services. It has over 300 thousand employees, and last year posted nearly $40 billion in revenue. China Telecom is over the hump of proving itself a profitable player, long past that hump in fact. China Telecom is benefiting right now from having beaten its larger competitor, China Mobile (NYSE: CHL), to market selling uber popular Apple iPhones. China Mobile currently lacks compatible technology. Analysts have China Telecom's earnings at $3.09 per share in 2012 and $4.15 per share in 2013. It has a 5 year PEG of just 1.03. I think China Telecom is probably the soundest Chinese telecom in that it has the best risk reward profile among Chinese companies. Take a closer look.
China Mobile may well be the elephant in the room of Chinese telecommunications, with some 600 million users. But so much of the Chinese market is about selling what is perceived to be the best and coolest, and the company will have to spend mightily to be able to sell Apple iPhones. More importantly to me, China Mobile is overpriced, with a 5 year PEG of 2.63. The inertia of being such a huge company makes growth difficult. China Mobile does offer a 3.7% dividend, but with its shares already trading at its 12 month target, I would either wait for a pullback, or find another company with better growth prospects.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend Baidu, China Mobile, 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.