Baidu Inc (ADR)
NASDAQ: BIDU
COMPANY DESCRIPTION
Baidu,
Inc. is a Chinese language internet search company, which engages in the
provision of internet search solutions and online marketing solutions. It
operates through Baidu Core and iQIYI segments. The Baidu Core segment offers
keyword-based marketing services. The iQiyi segment focuses in the membership
and online advertising services. The company was founded by Yanhong Li and Xu
Yong on January 18, 2000 and is headquartered in Beijing, China.
RECOMMENDATION
We rate Baidu
Inc a BUY. Below are the basic reasons to recommend this stock as a
BUY.
·
Baidu is one of China's most dominant internet
companies has been one of my favorite stocks for about a decade now. In that
time, the stock has been a top performer, returning nearly 2,000% since the
lows of the financial crisis. However, Baidu has struggled to move higher over
the past year, with its stock essentially flat over the past 52-week period.
Moreover, despite the company's recent better than expected earnings
announcement, Baidu is still down by about 21% from its highs earlier in the
year.
·
Baidu's stock currently trades at only 16-18
times 2019's average-higher end consensus estimates. In addition, Baidu is
expected to grow revenues by 20-30% and is set to expand EPS by 15-33% next
year. This suggests that Baidu's stock is quite cheap relative to its robust
growth rate, making it an extremely attractive buying opportunity at current
levels.
·
Baidu is growing into one of the most
diversified, successful, and profitable internet/technology companies in the
world. The company is currently valued at about $79 billion, and aside from
being one of the most widely used search engines in the world (mostly due to
its dominance in China), Baidu also operates very successful ventures in
streaming video, social media, AI, autonomous driving, as well as other areas. Although
Baidu search accounts for only about 2% (4th place out of any search engine) of
all worldwide search on any device, the company has a 2.56% (2nd place) in
mobile search, behind only Google (GOOG) (GOOGL). Moreover, Baidu has a
dominant 74% market share position in China (search), the biggest internet
market in the world.
·
Baidu is the parent company of iQIYI
(NASDAQ:IQ), China's version of a YouTube/Netflix type platform that has over
500 million monthly active users who spend a staggering 6 billion hours on its
service each month. Moreover, Baidu has a fast-growing social networking news
feed product like the Facebook (FB) app. Growth in this segment was
instrumental in growing revenues last quarter, a trend that is likely to
continue going forward. Furthermore, Baidu is one of the most advanced AI
leaders in the world. Last year, the company announced a 10-billion-yuan
autonomous driving fund and has launched projects in AI chips, ad features, and
smart speakers.
·
Baidu's multifaceted business portfolio
translates into massive ad revenues (over $11 billion last year, and likely
over $13 billion this year). Furthermore, due to the continuous internet user
growth in China, coupled with the company's expanding businesses, Baidu will
likely continue to see substantial revenue growth for years going forward. And
although margin compression is likely in some of Baidu's businesses like AI and
autonomous driving in the short-term; longer-term, these segments will probably
become significant cash generating vehicles for the company.
·
Baidu has grown revenues considerably in recent
years. In 2013, Baidu had RMB 31.8 billion ($4.77 billion) in full year ad
revenue and just RMB 142 million in "other" revenue. In 2017, the
company delivered RMB 73.15 billion in ad revenue and RMB 11.66 billion in
other revenues. That is a massive 165% increase in total revenues in 4 years
and a staggering 8,170% surge in "other" (non-ad) revenue in the same
timeframe. Moreover, Baidu's growth is far from over, this year revenues are
projected to rise to over $15 billion (RMB 100 billion), about a 20% YoY
increase, and next year revenues are set to expand to $18.22 (average
analysts' consensus estimate), RMB 121.53. So, more than 20% growth is expected
in 2019. Also, Baidu often tops revenues estimates, and it is likely that the
company will grow sales towards the upper range of consensus estimates, $19.55
billion (RMB 130.4 billion), which implies a revenue growth rate of closer to
30% next year is very possible.
·
EPS wise Baidu is expected to earn about RMB
70.56 ($10.58) per share, which puts its current P/E at about 21.36. However,
next year the company is projected to earn about RMB 81.56 ($12.23) per share.
Moreover, given that the company has a distinct propensity for surpassing
analysts' EPS projections, Baidu could and likely will earn towards the upper
range of consensus estimates which call for EPS of around RMB 94 ($14.09) per
share next year. This implies that Baidu, a dominant, rapidly expanding,
Chinese internet/technology company is currently trading at a forward P/E of
just 16-18 (probably closer to 16), while likely to grow revenues by 20-30%
next year, and likely to expand EPS by 15-33% next year. So, if we apply a 25%
EPS growth rate for next year and combine it with the 16 forward P/E multiple,
we would get a PEG ratio of just 0.64 per 2019 estimates, incredibly low for a
company like Baidu. Even if we use the 18 forward P/E multiple, Baidu's PEG per
2019 earnings comes in at just 0.72, still exceptionally cheap for a company
with enormous growth and earnings potential like Baidu.
·
Another factor that is likely to positively
impact Baidu's share price going forward is the apparent bottoming process
occurring in the Chinese stock market. Chinese stocks have been in a deep
correction since early in the year. In addition, the downturn intensified
following the economic ripples produced by trade tensions and other factors. In
fact, iShares China Large-Cap ETF (FXI) declined by nearly 23% from peak to
through and has only recently begun to bounce back. With the stabilization in
emerging markets and the quieting down of the trade war rhetoric, Chinese
stocks are likely to recover and proceed higher from here, which is beneficial
to Baidu's future price action.
LAST EARNINGS
Ad revenues rose by 25% YoY to 21.1
billion Chinese yuan RMB ($3.1 billion). Total revenues increased to RMB 26
billion ($3.93 billion), 24.4% YoY increase from RMB 20.87. Total revenues beat
estimates of RMB 25.55 billion. Mobile revenues rose to 77% of total revenues
vs. 72% 1-year ago. Operating income rose by 29% YoY. Net income rose by 45%
YoY, from RMB 4.4 billion to RMB 6.4 billion. The company expects Q3 revenues
of RMB 27.37-28.77, a 23-30% YoY increase, and 18.9% higher than consensus
estimates.
Disclaimer:
Views are
strictly personal. This Interim Financial Results & News
posts or updates includes forecasts, projections and other predictive
statements that represent Vtrade's assumptions and expectations in light of
currently available information. These forecasts, etc., are based on industry
trends, circumstances involving companies and other factors, and they involve
risks, variables and uncertainties. The Group’s actual performance results may
differ from those projected in these Interim Financial Results. Consequently,
no guarantee is presented or implied as to the accuracy of specific forecasts,
projections or predictive statements contained herein.
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