Baidu (BIDU) spent the first half of 2013 mostly treading water. But the stock took off in July, thanks to strong earnings as well as a growing mobile business. For the year so far, BIDU stock has gained about 66%.
Investors have shown a renewed interest in China stocks, lately — even the IPOs have done quite well, as seen with 58.com (WUBA) and Sungy (GOMO). BIDU also got a piece of the action in late October, when the company issued stock in majority-owned Qunar.com (QUNR), which is travel fare comparison service. QUNR is up roughly 80% since its IPO.
Investors seem to be less worried about some of the nagging issues about accounting fraud and instead are looking at the huge growth potential of China.
So is BIDU still a good deal at current levels? To see, let’s take a look at the pros and cons:
BIDU Pros
Online Search: BIDU is the dominant player in online search, but it knows that it must continue to innovate. Some of the company’s latest efforts include improved natural language processing, image recognition and voice systems. BIDU has been building Big Data technology to better predict what users are searching for, as well as adding richer content, which should allow for more opportunities to monetize its traffic. One example is the company’s partnerships with more than 700 hospitals. With this, BIDU can provide value-added services like online advisory, appointment bookings and online reviews.
Mobile: BIDU has been late to the mobile game, but the company has made great strides in catching up. It certainly helps that the company already has a strong brand, a powerful infrastructure and many talented engineers. BIDU has invested significantly in building a mobile ecosystem — tools and resources for developers, who can create useful native apps. Distribution is also key, and BIDU recently purchased 91 Wireless, which has a large mobile distribution footprint. With that acquisition, BIDU now logs about 80 million app installs every day.
Growth: Growth remains robust. In the latest quarter, revenues jumped by 42.3% to $1.4 billion. And for Q4, the company sees revenues increasing anywhere between 45.5% to 49.6%. All in all, it looks like BIDU is benefiting nicely from the growth in mobile in China. While it’s true that profits have been muted, that’s to be expected from a company like BIDU — in order to build a solid foundation for mobile, the company needs to make substantial investments.
BIDU Cons
Competition: In the Chinese market, Google (GOOG) has been a non-factor since it left the market a few years ago. But competition remains intense. Perhaps the most formidable is Qihoo (QIHU), which launched a search engine in August 2012. Since then, QIHU has gained lots of traction and now has more than 20% of the market. BIDU has lagged in key areas, including social networking and messaging apps. For the most part, these categories have strong operators like Weibo, Weixinm and Tencent.
China Factor: Much of BIDU’s revenues come from China, and while the Chinese market is huge, the company will eventually need to go beyond the borders. But unlike other companies — like Tencent — BIDU has had mixed success in global markets. With China showing sings of a slowdown, BIDU could be in trouble. China is also in the midst of major reforms, which could be wild card for BIDU. In other words, a shift in government policy could favor competitors.
Valuation: With the rally, BIDU stock is now trading at a hefty level. The price-to-earnings ratio is a pricey 34X — and with no dividend payout to sweeten the deal. In comparison, Google’s P/E is at 28X and Apple (AAPL) has a multiple of only 14X.
BIDU Verdict
There are certainly some issues with BIDU stock. The company has been slow with social networking and chat services, and the valuation is far from cheap.
But the fact is that BIDU has done a tremendous job transitioning to mobile apps. The company says it is now the No. 1 player in the market, and the total installed base for its search app is more than 330 million — up 50% on a quarter-over-quarter basis. At the same time, China’s Internet population continues to grow. In the past year, it rose by 10% to 591 million. About 20% access the web via mobile devices.
So should you buy BIDU? Yes — if you want to benefit from the mobile revolution in China, the stock’s pros outweigh the cons.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
