The ongoing feud between China’s tech companies and the Chinese government continues to dominate investors’ view of these firms. Beijing has, in particular, targeted tech companies that it feels are involved in anti-competitive practices. Consequently, the shares of several top Chinese businesses, including Baidu (NASDAQ:BIDU) stock, are trading at rather low multiples.
Baidu has been growing at a healthy pace and continues to generate sizeable cash flows. Eventually, its performance should supercharge BIDU stock.
Baidu provides internet and AI-related services in China, and it’s the second-largest search engine globally. Similar to Google, it offers a diverse set of services, including maps and health information. Additionally, it owns a 56% stake in online entertainment service iQIYI which boasts a subscriber base of over 100 million.
As Beijing attempts to reassert its power. BIDU stock has not been able to gather a lot of momentum. The stock trades at just 2.7 times analysts’ average forward sales estimate. That’s a surprisingly low valuation for a growing tech stock with impeccable fundamentals such as Baidu. As a result, investors have a chance to acquire the stock at an attractive valuation.
A Stellar Earnings Performance
Despite the crackdown, the fundamentals of Baidu’s core business remain incredibly strong. It generated 31.4 billion Yuan in its second quarter, representing 11% year-over-year growth. Its revenue gain was driven by the strength of its AI and digital marketing businesses.
The crown jewel of its business remains its robust search engine, which has a 70% share pf the Chinese market. It maintains a sizeable lead over its second-largest rival, Sogou (NYSE:SOGO), whose market share is just 14%.
Moreover, the revenue of Baidu’s online marketing services business shot up 18% in Q2 versus the second quarter of 2019. China’s advertising market has been booming, and Baidu has successfully taken advantage of the growth.
Additionally, its investments in areas aside from its digital businesses indicate that its growth outlook is outstanding. Baidu signed a deal with Chinese automotive manufacturer Geely to bring a self-driving electric car to the Chinese market by 2024. Moreover, the government probably won’t damage the EV sector as investments in the space are highly encouraged and subsidized by Beijing.
A Massive Cash Balance
Baidu’s core internet business has been on fire and has helped generate a truckload of cash. The company generated 9.4 billion yuan of cash in Q2 , excluding cash outflows related to iQIYI. After the latter investments, Baidu generated free cash flow of roughly $1.1 billion.
iQIYI has been a financial burden on Baidu, as the streaming platform continues to lose money. Baidu planned to sell off its stake in iQIYI and spoke with Tencent (OTC:TCEHY) about such a deal last year, but the companies failed to reach an agreement. In all likelihood, though, Baidu will be able to sell its stake in iQIYI within a couple of years.
Baidu’s Q2 free cash flow came in at 5.4 billion Yuan, resulting in a FCF margin of 17%. The company has consistently generated positive free cash flows, enabling it to fortify its balance sheet. Its short-term liquidity of $26 billion represents a five-year high.
The Bottom Line on BIDU Stock
BIDU stock and other Chinese equities have been hammered due to the government’s crackdown. The bearish sentiment towards the sector has created attractive entry points in multiple companies with robust underlying businesses.
Baidu is one such business, as it has stellar fundamentals and a spectacular outlook. Its low valuation makes it an attractive bet.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
