News about Baidu Inc (ADR) (NASDAQ:BIDU) has brought a new round of volatility. The Chinese-language internet search king saw its stock fall on news of the resignation of COO Qi Lu. While that change creates a degree of uncertainty, it also becomes a speed bump for Baidu stock.
As China’s middle class increases its ranks and as Baidu grows stronger, the stage is being set for a battle with its most direct peer.
A Buying Opportunity
In my mind, the resignation of COO Qi Lu creates a buying opportunity. The resignation should carry little relevance to the future of BIDU. In fact, Dr. Lu will remain with the company as Vice Chairman of the Board of Directors. I fail to see how this becomes a loss for BIDU.
The charts also indicate a buying opportunity is forming. Baidu stock trades close to $240 per share as of this writing. In early February, the stock bounced back from a brief dip below $210 per share.
It rose in the next few weeks to about $270 per share. In early April, the stock recovered from a dip toward the $216 per share level before rising above $284 per share. Given this history, it may have a little further to fall.
However, if the stock fell below $225, I would recommend a buy.
The company also compares well to its more direct peer, U.S. based Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG). At a forward PE of 29, holds a similar PE to that of Alphabet stock. Despite comparable valuations, Baidu stock wins hands down on growth potential.
As my colleague Luke Lango points out, valuations differences make little sense. Baidu’s market cap stands at $84 billion, compared with about $750 billion for Alphabet.
Google Rivelry
However, the best reason to buy the stock may be a more direct rivalry with Google. I pointed out why BIDU has positioned itself to take on Google in a previous article. Like GOOGL in the rest of the world, BIDU dominates search in China.
Baidu even goes so far as to make similar investments in self-driving cars and various artificial intelligence applications. Although the Chinese government blocks Google for now, an eventual direct showdown between the two companies appears likely.
At home, Google faces increasing complaints about stifling competition. Although the Trump Administration has shown a preference for competitive industries, Google lacks any true peer in the U.S.
Competitors such as Bing, operated by Microsoft Corporation (NASDAQ:MSFT) and Yahoo! (which is owned by Verizon Communications, Inc. (NYSE:VZ)) have found little success in attracting search traffic from Google. Both of these companies also focus most of their resources outside of search.
BIDU holds the advantage of enjoying a comparable focus to Alphabet Inc. Baidu would face as much difficulty unseating Google in the U.S. as Google would competing with Baidu in China. However, that has not stopped the Chinese internet search company may be setting the stage for a more substantial U.S. presence.
It already operates Baidu USA in Silicon Valley. For now, that remains a research center. However, this center could serve as a segue into the U.S. market. Even if Baidu struggles in search, they could make huge inroads into markets such as AI or self-driving cars.
Final thoughts on Baidu stock
Investors should treat the COO resignation as a buying opportunity. GOOGL and BIDU stock trade at comparable valuations. However, with the much smaller market cap, investors have a better chance at outsized gains with BIDU. Moreover, the stage is being set for head-on competition between Google and Baidu.
How these companies would fare in the other’s home market remains unclear. However, since both enjoy dominance in entrenched markets, BIDU’s lower market cap allows for a higher level of growth potential.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
