Whether you want to buy Baidu (NASDAQ:BIDU) stock, or any Chinese company, depends a lot on what you think of China’s government.
If you consider Xi Jinping the second iteration of Josef Stalin, then sell Baidu and buy Northrup Grumman (NYSE:NOC), Raytheon (NYSE:RTN) or even Boeing (NYSE:BA). If you think he’s more like Bernie Sanders, then buy the dip.
Baidu stock trades at about $153. That’s a market cap of $55 billion for a technology company with estimated revenue of $18 billion and a price-earnings ratio of 8. Compare that to Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), selling at 31x earnings and nearly 10x revenue. A reminder that the Chinese cloud stocks dominate the Chinese economy to a far greater extent than Google ever dreamt of.
Yet analysts consider Baidu only a moderate buy.
Xi is Stalin
The bearish case assumes Chinese President Xi Jinping woke from troubled dreams last year to discover he was a communist. The regime’s tech crackdown has sent Baidu stock down 53% since mid-February.
The crackdown includes not only strict enforcement of antitrust rules, like an end to exclusivity contracts, but a wary look at mergers. Regulators are now unlikely to approve Baidu’s $3.6 billion purchase of YY Live, a live streaming business owned by Joyy (NASDAQ:YY). (Think of YY as analogous to Amazon’s (NASDAQ:AMZN) Twitch.)
China has soured on gaming generally, telling kids they can only play games one hour a night. This move has gotten outsized press in the west. (Maybe you want to copy it.)
Tech whisperer Cathie Wood has seen enough. Her ARK Autonomous Technology & Robotics ETF (NYSEARCA:ARKQ) has been selling Baidu recently. This despite it opening a robotic-taxi service in Shanghai, which would seem to be right up ARKQ’s street.
Xi is Sanders
Without Xi, Baidu is worth double its current price, writes our Mark Hake, based on its free cash flow.
Baidu is one of the world’s most innovative companies. In addition to the robo-taxi, its launching a semi-autonomous electric truck. CEO Robin Li is a huge believer in artificial intelligence (AI). China’s cloud market is estimated to be worth $6 billion, dominated by the cloud companies like Alibaba Group Holding (NASDAQ:BABA) and Tencent Holding (OTCMKTS:TCEHY).
Chinese stocks could be falling for reasons other than communism. The pending failure of Evergrande is spreading contagion throughout China’s stock market, which has had a horrible September.
If that’s the case, stocks like Baidu are a bargain. Before the most recent fall, our Joel Baglole recommended it. Baidu hasn’t been singled out for punishment, he writes, nor has it been forced to pay into a “common prosperity fund” meant to fight inequality.
Nicolas Chahine agrees, calling Baidu a “long-term success story.” Still, he recommends caution, given uncertainty about regulation worldwide.
The Bottom Line for BIDU Stock
I don’t think Xi Jinping is Stalin. I don’t think his position is that strong.
Neither do Chinese investors. Big tech stocks like Baidu, which trade in the U.S., have fallen much harder than the average Chinese stock. The economy continues to grow, Evergrande looks to be contained.
If Xi’s policies did start costing consumers or investors money, I think he would be forced to adjust, or be forced out. That’s a minority view. But you can’t run a Stalinist state in a technology world without killing innovation, the goose that lays all those golden eggs.
It will take Baidu stock a year to recover from the recent shocks, assuming things stop shaking. It’s also possible I could be completely wrong. That makes Baidu a long-term speculation. It’s where you put a few dollars for 2024 gains. Don’t go overboard, but don’t miss the opportunity.
On the date of publication, Dana Blankenhorn held long positions in AMZN and BIDU. 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 firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.