Should Baidu (BIDU) Stock Be In Your Portfolio?
Baidu Inc. (BIDU) is a Chinese-language internet search provider, established in 2000, with its headquarters in Beijing, China. The company also has offices in Shanghai, Guangdong Province, Japan, USA, Thailand, Brazil, Egypt, and Indonesia. BIDU’s mission is to provide the best and most equitable way for people to find what they are looking for, leading many to call the company the ‘Google of China’.
Baidu designs and delivers its online marketing services primarily on its Baidu.com website to its online marketing clients. In January 2012, Baidu had about 488,000 active online marketing customers, which mainly consist of small and medium enterprises, but also larger domestic companies (along with subsidiaries of multinational companies).
Baidu filed with the SEC to raise capital through an initial public offering (IPO) on August 5, 2005 on the NASDAQ, at $27/share. BIDU has made it clear that it does not intend on paying any cash dividends on its ordinary shares in the near future. Baidu’s fiscal year ends on December 31st and the company normally announces earnings reports during conference calls in February, April, July, and October.
BIDU, like most other search engines, generates revenue by offering merit-based online marketing services and display advertisements through both the Baidu organic websites, and its affiliated websites (Union businesses), which are programs through which the company grows the distribution of its clients’ sponsored links by leveraging traffic directed from Baidu Union members or by distributing Baidu’s customers’ paid links through Baidu Union members.
Baidu pays its Baidu Union members for traffic acquisition, and in turn charges its customers, which accounts for its gross revenue. That, in simple terms, is how Baidu makes its money, according to Baidu’s investor frequently asked questions webpage.
In recent years, Baidu has expanded and outgrew its humble origins. In April 2009, Baidu launched Phoenix Nest, an enhanced marketing platform. This advanced platform functions through the use of an algorithm which allows unveiling useful parts of the hidden web, and produce meaningful search results that help customers so that they can better manage their spending, and in turn, have better return on their investments.
It is the platform to go to for clients looking for quality search. Baidu has also launched Aladdin, which is another powerful platform used to unveil and index hidden parts of the web, it is similar to Phoenix Nest, but Baidu is still looking to build and improve on it in order to expand on the capabilities of the platform.
Meanwhile, BIDU, is also working on an innovative technology searching concept, called Box Computing. Its purpose is to simplify the user interface, which is increasingly becoming more multifaceted as the technology that goes into it also becomes more complex.
Box Computing will enable users to type a command into a box, on any device screen and the system will automatically process the command and take a shorter route to delivering the most relevant information, be it running a software application, a video, opening a webpage, or taking the user to an online services representative.
The Chinese search engine goliath has been seeking to boost mobile investment, after its latest earnings report which indicated that profits rose by about 34%. BIDU will focus on increasing investments through the development of search and mapping apps, which are very commonly used on smartphones and tablets. BIDU’s CEO Robin Li stated that mobile revenue comprised more than 30% of total revenue during last quarter, as many users tend to use smartphones and tablets during summer vacations more than their personal computers or desktops.
China’s largest search provider is set to team up with China’s privately owned Dalian Wanda Group, which will be launching an $813 million e-commerce joint venture with BIDU and Tencent Holdings Ltd (TCEHY). The venture’s bulk, around 70%, will belong to Wanda, while 15% will belong to BIDU, and the remaining 15% will be owned by TCEHY.
This will likely be beneficial for BIDU in the long run as the company could reap profits from this deal, though it could be a big cost in the short term. BIDU has also been on the lookout for any acquisitions that could increase its share of the market. Acquisitions such as Nuomi could definitely help the giant internet firm if BIDU utilizes them properly.
BIDU has also upped its research and development spending, as it is interested in developing artificial intelligence. BIDU opened a research center in California, and hired Andrew Ng, GOOGL’sformer chief scientist, known for his contributions on artificial intelligence.
BIDU’s financials have been far from poor for the latest quarter, ended on 6/30/2014. The virtual giant has managed to make $1,932 million in revenue, with a gross profit of $1,208.22 million, and a positive net income of $571.70 million. The company also has a diluted net EPS of $1.63/share. Sales Growth was up by 56.82% year/year, and 26.84% from previous quarter.
The company’s assets totaled $13,864 million, while liabilities were about $6,387 million, and total stockholders’ equity was $7,477 million. BIDU has a forward P/E ratio of 36.06, relatively making it overvalued, compared to GOOGL’s P/E ratio of 26.47, but still a good ratio compared to TCEHY’s P/E of 39.38, and Facebook’s (FB) P/E of 56.83. Looking at the EPS surprise chart for BIDU, things don’t seem to be looking too bad either.
We can see how BIDU has struggled to meet analysts’ EPS estimates in the past quarters, but how it has also mustered enough revenue and profit to beat analysts’ expectations by a solid amount for the last two quarters.
BIDU currently maintains a Zacks Rank #1 (Strong Buy), and many analysts have revised their EPS estimates 60 days ago and increased them from $1.35/share to $1.61/share. Recent pullbacks are also a great buying opportunity as shares are trading for roughly $10 less per share from what the stock price was right after earnings were announced for the most recent fiscal quarter ending on 6/30/2014, when EPS earnings surprised by +31.45%.
Earnings ESP is currently -2.48% though, as the Zacks Consensus EPS Estimate is $1.61/share, while the Most Accurate Estimate is $1.57/share. EPS growth is up 33.61% from the previous year, and 40.52% from previous quarter.
BIDU is very likely to continue its strong growth and earnings results, thanks to increased research and development spending, and increased mobile smartphone users. It seems like a better investment; however, investors should be on the lookout as analysts continually revise their EPS estimates heading into mid-September, as the company’s outlook can vary, especially when China’s GDP growth hasn’t been as strong this year.
BIDU is positioned to grow, provided it continues its acquisitions and expansion into its domestic market, which it holds the lion’s share of already. Coupled with maintaining a strong balance sheet and income statement, BIDU is a serious growth stock for any investor.
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