It’s been three weeks since Baidu Inc (ADR) (NASDAQ:BIDU) announced third-quarter earnings. While they were outstanding compared to the same period a year earlier, investors weren’t pleased with the Q4 guidance knocking BIDU stock down 8.2%. The BIDU stock price has flatlined ever since.
With the markets continuing to deliver for investors, the idea of buying on the dips is a subject gaining traction in the media lately.
Buying GOOGL and BIDU Stock on the Dips
I discussed this subject in October using Alphabet Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) as the guinea pig. Looking back five years, I found that GOOGL stock fell 5% or more in a standard week of trading just nine times out of 312 weeks.
“As Google’s share price moves higher, a 5% decline becomes less and less plausible,” I wrote on October 13. “However, if you’re going to pick the most likely month for this to happen, my research suggests October (three declines of 5% or more) or January (two 5% drops) are the likeliest months for it to happen.”
It didn’t happen in October. If you want to buy Alphabet stock on the dip, you might have to wait until January or later in 2018. As for BIDU stock, it’s had 26 weekly declines of 5% or more over the past five years. So if you’re looking to buy on the dip, BIDU’s definitely the better bet.
Is BIDU Stock Better?
Baidu is the second-largest search engine provider in the world; Google is the largest. Baidu owns the Chinese market with a 75% share; Google owns virtually everywhere else.
Louis Navellier recently made the argument that BIDU is in a better position than Google because it’s in good with the Chinese government and doesn’t have as many regulatory hurdles to jump through.
“BIDU doesn’t have these problems, which means in the long run its growth is much easier to achieve,” Navellier wrote on November 6. “What’s more, since GOOGL walked out of China years ago, that space has been filled by BIDU and similar companies. Moving into that space now would be like watching MSFT’s Bing try to overtake Google.”
So, by Navellier’s thinking, BIDU is the better stock. It’s hard to argue with that thinking.
However, before crowning BIDU stock the better buy, let’s have a quick look at both companies’ cash flow situations to see if we can’t sway things back to Google.
BIDU Stock’s Free-Cash Flow
You know what they say: “Cash doesn’t lie.”
Sure, you can fudge the earnings, but it’s a lot more difficult to play around with cash. You either have it or you don’t.
In Baidu’s third-quarter report, it had free-cash flow of $1.2 billion or 35% of revenue. In last year’s Q3 report, it was 19%; 27% in Q2 2017. The company expects fourth-quarter revenue of at least $3.34 billion. Its revenue through nine months is $9.1 billion. At $12.4 billion in revenue for the year, Baidu’s free-cash flow should be about $4.3 billion. That’s 5.2% of its market cap.
Google’s free-cash flow for the trailing 12 months is $24.2 billion or 3.3% of its market cap, 190 basis points lower than Baidu.
Bottom Line on BIDU Stock vs. GOOGL
BIDU might be the more volatile stock but given its valuation, at least in terms of free cash flow, it appears cheaper than Alphabet and it has that captive Chinese audience. Therefore, I’m going to go with Baidu.
That said, you won’t go wrong owning either stock.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
