- Baidu's stock has risen 28% since its 2014 lows.
- Baidu is fundamentally solid with robust revenue growth and profitability.
- Baidu is attractive for long term investment.
Chinese internet search giant Baidu’s (NASDAQ:BIDU) stock price has risen to $184 a share. Since its 2014 low of $143 a share on 7 April 2014, the stock price has gained by over 28%. Is Baidu still attractive at its current valuations? We think so.
Earlier this year, macro-economic and geo-political concerns catalysed Baidu’s 28% fall from its 52 week high of $189 a share. The fall had little to do with Baidu’s fundamentals as China’s poor economic outlook overshadowed Baidu’s stellar track record. We added Baidu to our top stock picks on April 10, 2014 and the stock has returned over 22% in less than 3 months. The stock may not continue to rise at the same pace. However, here’s why we think it’s a good investment for the long term.
Baidu Revenue Growth & Profitability
Baidu’s growth story is one that definitely inspires confidence. Q1 2014 saw Baidu shake off concerns, as revenue grew by 59.1% in its domestic currency. What’s really impressive about Baidu is that it has delivered equally stellar revenue growth over long periods of time. Baidu has registered Compounded Annual revenue Growth Rates (CAGR) of 64% over the last 3 years and 66% over the last 5 years.
With Google’s voluntary exit from China, Baidu is left only with the local competition to contend with. It controlled 63% of the search market at the end of 2013. Baidu’s solid revenue growth is likely to continue given its firm grip over the Chinese market.
In Q1 2014, Baidu recorded robust operating and net profit margins of 25% and 26.7% respectively. Profit margins have declined when compared with their 3 year averages of 46% and 42% due to Baidu’s aggressive investment in growth. However, profitability is still healthy, especially for such a fast growing company.
In the near term though, profit margins could continue to contract given that search engines (Baidu, Google and Yandex) have been facing a rise in Traffic Acquisition Costs (TAC). TAC is what Baidu pays out to partner sites on which it serves ads. Further Baidu is incurring higher expenditures on content costs for its online video site ‘iQiyi and promotions for its mobile apps.
However, the company’s track record is indicative of the levels it can potentially reach in the long run if it decides to chase profitability.
Potential Drivers of Baidu’s Future Growth
With its acquisition of 91 Wireless, Baidu has strengthened its position in mobile app and game distribution, mobile advertising, payment app platforms and cloud storage. The company has also bolstered its Location Based Services (LBS) with the acquisition of local deals platform ‘Nuomi’. Baidu’s recent acquisition, online video site iQiyi is the biggest in China by unique mobile users. Clearly Baidu is focussed on the mobile user, possibly the most precious commodity in the internet economy today.
Baidu is also diversifying into other businesses. Its 55% stake in travel and e-commerce business Qunar represents its stake in the growing (22% annually) online travel industry in China. Baidu’s foray into intelligent hardware and smart devices is on similar lines as that of Google’s. As things stand, all user related data collected from these smart devices will be stored on Baidu’s cloud platform. Both device manufacturers and Baidu will have access to this data which could be a great value to its core business of search and advertising.
Baidu’s mobile payments service ‘Baidu Wallet’ gives it access to China’s fast growing $199 billion mobile payments market.
Baidu Stock Valuation
In the near term, Baidu’s stock could be vulnerable to any signs of weakness in the Chinese economy. However, with its dominance over the growing Chinese internet landscape and its mobile focus, Baidu is poised for growth.
Baidu’s stock currently trades at a stock price of $184 a share. At P/S and P/E multiples of 11.2 and 36.1, Baidu’s valuations are higher than those of its peers.
That said, we think that premium valuation stems from the fact that Baidu is the fastest growing and the most profitable in the pack. Baidu’s premium valuation could make it a tad risky in the short term. However, we think Baidu is a good investment option for those who are in it for the long haul. Baidu stock is a buy, as per our stock analysis of Baidu.