Chinese digital search giant Baidu Inc (ADR) (NASDAQ:BIDU) recently reported first quarter numbers, and they were much better than expected. It was a clean double beat and raise quarter for the internet giant wherein revenue growth, margin expansion, and profit growth all accelerated. Consequently, Baidu stock rose sharply.
But at $250, Baidu stock is still deeply undervalued.
This company is China’s Alphabet Inc (NASDAQ:GOOG), and as China’s Google, BIDU is looking at persistently strong revenue growth in the 20%-plus range over the next several years.
BIDU stock, though, isn’t priced for this reality. It continues to trade a discount to growth prospects on the idea that the China consumerism growth narrative is going to evaporate or that regulators will step in and end the business.
Neither of those are going to happen.
As such, buying BIDU stock while it remains undervalued is the smart move.
Here’s a deeper look:
Baidu Has Chinese Google Written All Over It
Here are the two important numbers from Baidu’s most recent earnings report: revenue growth of 31% and operating margin expansion of 900 basis points.
Baidu reported revenue growth of 31%, which is the company’s best mark in several quarters and continues what has been a multi-quarter uptrend in revenue growth.
Operating margins powered 900 basis points higher from 17% to 26%. That 26% margin in Q1 is also 200 basis points higher than last quarter.
This robust revenue growth and healthy margin expansion is being driven by a few things.
Firstly, the digital search advertising business continues to grow at a robust rate, led by a huge mobile-first push (mobile revenues accounted for 78% of total revenues, versus 70% a year ago).
Secondly, the company has its hand in every hyper-growth segment imaginable. The company provides cloud services through its Baidu Cloud business, which is growing rapidly and appears to have dominant positioning in the financial services industry.
BIDU is also fully immersed in the autonomous vehicle world with its autonomous driving platform Apollo. Management said on the call that Apollo is moving at “China Speed,” which is lingo for really, really fast.
Then there is the company’s whole smart home ecosystem, powered by DuerOS. That business is also ramping very quickly. Voice command on DuerOS surpassed 200 million counts in March, and that is more than double the volume in December.
If this doesn’t sound like China’s Google, then I’m not sure what does. The company is driving consistently huge revenue growth not just through its massive digital search advertising business, but also through ancillary hyper-growth businesses like cloud, autonomous driving, and smart home.
As such, from head to toe, it is safe to call Baidu the Chinese Google.
Baidu Stock Isn’t Priced Like the Chinese Google
But the valuation says otherwise, and that is an opportunity. Every U.S. company and its Chinese counterpart have somewhat comparable valuations. Except for Google and Baidu.
Amazon.com, Inc. (NASDAQ:AMZN) has a market cap of $750 billion. Alibaba Group Holdings Ltd (NYSE:BABA) has a market cap of $450 billion. Amazon is roughly 70% more valuable, but both are worth hundreds of billions of dollars.
Facebook Inc (NASDAQ:FB) has a market cap of $500 billion. TENCENT HOLDING/ADR (OTCMKTS:TCEHY) has a market cap of $460 billion. Facebook is roughly 10% more valuable, and both are worth hundreds of billions of dollars.
Twitter Inc (NYSE:TWTR) has a market cap of $23 billion. Weibo Corp (ADR) (NASDAQ:WB) has a market cap of $25 billion. Twitter is roughly 8% less valuable, and both are worth somewhere between $20 and $30 billion.
All of those are more or less similar, with the biggest discrepancy being around 70%.
Now lets look at Google versus Baidu.
Google has a market cap of $700 billion. Baidu has a market cap of $86 billion.
In other words, whereas other U.S. companies and their Chinese companies trade at roughly comparable valuations, Google is more than eight times as valuable as Baidu. Given the aforementioned parallels between the two companies and the robust revenue growth and margin expansion happening at BIDU, that valuation discrepancy makes no sense.
As such, it is pretty safe to say that Baidu stock is way undervalued.
Bottom Line on Baidu Stock
This is the Chinese Google, but it is not being valued as such. This valuation discrepancy is an opportunity. Eventually, the market will get over Chinese regulation fears and Baidu stock will soar higher.
As of this writing, Luke Lango was long BIDU, GOOG, AMZN, BABA, FB, and WB.