Baidu (NASDAQ:BIDU) illustrates the extent to which Chinese stocks still depend on western capital.
The search engine and cloud computing company delivered second-quarter results early this month. These saw revenues grow 27% year-over-year in core operations, 17% quarter-to-quarter. There was non-GAAP net income of $830 million, or $2.39 per share.
Yet, barring any big moves in today’s premarket, BIDU stock will open for trade at below $154 a share, sporting a market capitalization of about $53 billion. Shares are down 26% on the year and have halved from their February peak. The price-to-earnings ratio is below 8.
Why? In one word, communism.
Chinese Communists?
China is an authoritarian country. If it were communist, companies like Baidu would not exist.
Nevertheless, the government’s antitrust crackdown has economists like George Magnus screaming “Communist political control.” Capital is being politicized, he argues so fundamentals go out the window. Chinese stocks should trade at a permanent discount.
TV analyst Jim Cramer, burned by his call to buy the initial public offering of DiDi Global (NYSE:DIDI), agrees with Magnus. Investors should avoid Chinese stocks, he says, because of uncertainty in government policy.
The voice of Ray Dalio of Bridgewater Associates, who is worth $20 billion, is being drowned out. The government is executing antitrust policy and seeking to reduce inequality, he writes. Critics are missing out.
Regardless of why China changed its policies, they have had an enormous impact on Baidu. A March issue of new stock in Hong Kong went off at the equivalent of $260 a share. Baidu is also selling debt at 1.13% above comparable Treasury bonds, with their “fair value” pegged at 2.42%.
What’s Baidu Doing?
Baidu has always depended on investors snapping up its best ideas as spin-offs.
The video site iQIYI (NASDAQ:IQ) is a Baidu spin-off. The travel site Trip.com Group (NASDAQ:TCOM) is also a Baidu spin-off. Baidu has done spin-offs in online education and finance.
Its latest effort is Kunlun, which designs artificial intelligence processors for edge applications. Kunlun was spun out with a $2 billion valuation. It would be higher, except Chinese-based manufacturers can’t produce chips with lines closer than 14 nanometers. Samsung (OTCMKTS:SSNLF), which has been producing 7-nm chips for Kunlun, is under pressure to cut it off.
Baidu also has a robo-taxi unit called Apollo which it says will become the “Android of the autonomous car industry.” A state-owned company plans to build 1,000 robo-taxis around it. There were rumors of a spin-off in 2019, but that hasn’t happened.
Baidu also has the AI voice unit Xiaodu, which is raising money from private equity. This is the new trend, private equity stepping in when public markets can’t deliver. It’s a new challenge to Beijing policymakers who are trying to spread the tech wealth. It’s a good indication that their work isn’t done yet.
The Bottom Line on BIDU Stock
This redistribution of wealth thing is trickier than even Xi Jinping thinks.
If the aim of the crackdown is to give lower-income Chinese a taste of the wealth produced by companies like Baidu, it’s failing. Their stocks have crashed, and billionaires are snapping up bargains through private equity.
If China can’t untangle the wealth concentration what chance do American policymakers have? Baidu CEO Robin Li has seen his fortune dwindle during the crackdown, but he’s still worth $8.8 billion.
The result is that shares like BIDU stock look like incredible bargains. Tech stocks aren’t supposed to have PEs of 8. But with their credibility, and that of the government, so low right now, that’s where they will remain for a while. My guess is not forever.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
