- Baidu’s stock price has risen significantly over the last six months.
- Baidu’s revenue growth and profitability are healthy at current levels.
- Baidu’s valuations indicate a huge upside potential.
Baidu’s (NASDAQ:BIDU) stock has had a fabulous run over the last six months. The Chinese search giant has seen its stock price appreciate by over 43% since 31 March 2014 (6 months). At its current valuations, Baidu appears to be much more expensive when compared to its peers, Google (NASDAQ:GOOG) and Yandex (NASDAQ:YNDX). However, Baidu’s revenue growth and profitability are higher than those of its peers. Further, a look at forward earnings estimates also indicate an upside from its current stock price of $218.23 a share. Baidu is an attractive investment option for long term investors.
Baidu Stock Price Movement
After nearly hitting $185 a share in the first week of March 2014, Baidu’s stock price tumbled by over 20% within a span of one month. The stock was among those impacted by concerns about the health of the Chinese economy and the Russia-Ukraine crisis which erupted parallely. Since then, Baidu’s stock price has rebounded strongly on the back of solid financial performances in Q1 and Q2 2014.
Source: Baidu stock price chart
At its current stock price, Baidu has gained by about 56% from its LTM low of $143 a share, clocking a gain of 25% since the beginning of 2014. In spite of the heavy gains, Baidu remains attractive based on several factors like revenue growth, profitability and valuations.
Baidu Revenue Growth
Baidu’s long term revenue growth track record has been exceptional. The company has clocked 3 and 5 year compounded annual growth rates of 60% and 64% respectively. In the latest quarter, Baidu’s revenue grew by an impressive 58.5% YoY (over Q2 2013). Baidu’s ability to sustain its high growth rate is a big positive. The search giant has also been making significant progress on mobile platforms. Baidu’s revenue from mobile platforms grew to 30% in Q2 2014, marking a big jump from its standing at 20% at the end of FY 2013.
Baidu’s profit margins, both operating and net, have declined quite sharply over the last two years. The company’s operating margins which were around 50% have declined to about 30% in Q2 2014. Further, Baidu’s expansion into new geographies and business, and the increasing competition could keep profit margins from expanding significantly in the near future. On the contrary, profit margins could contract in the coming quarters.
The company’s management wasn’t expecting any growth in absolute profits for the year. Given that background, the performances have been surprisingly good in 2014 so far. For instance, factoring in no absolute growth in operating profits, operating margins should have come in at about 20% for the full year. During the two quarters in 2014 so far, operating margins have averaged over 27%.
Further, operating and net profit margins of close to 30% (in Q2 2014) are definitely healthy when looked at individually, though they pale in comparison with Baidu’s exemplary track record.
At $218 a share, Baidu’s PE ratio and Price to sales multiple stand at about 40 and 12 respectively. Though these valuations are much higher than those of Google and Yandex, Baidu’s revenue growth and profit margins are also relatively superior to the two competitors.
Baidu’s FY 2015 analyst estimates of earnings (Non GAAP EPS) and revenue are currently $8.43 a share and $11 billion respectively. Baidu has typically beaten estimates in the past. However, based on these numbers, Baidu’s forward PE and PS stand at about 26 and 7, much lower than its current valuations. For that matter, even Baidu’s current valuations are way lower than the levels at which the stock has been trading historically.
Taking two approaches, we look at:
- Baidu’s lowest PE and PS valuations in the last one year
- Baidu’s average PE and PS valuations in the last one year
Based on the lowest PE and PS valuations (in the last one year) of 29.27 and 9.13 respectively, Baidu’s stock price should trade at $248-$283 a share. A price of $266 a share, the average of the two target price projections, translates to a 22% upside from Baidu’s current stock price of $218 a share.
Based on the average P/E ratio and P/S ratio valuations of 35 and 11.7, Baidu could trade at $295-$363, translating to an average price target of $329 a share. The price target represents a 51% upside over the next 15 months.
Our Baidu stock analysis video highlights more fundamental aspects of the company. Baidu has returned over 44% since we added it to our top stock picks in April 2014. In line with our long term view of the stock, we assign it a ‘buy’ rating.