Baidu (NASDAQ:BIDU) shares have been all over the map, as BIDU stock has experienced painful selling pressure after hitting new highs in February. Many investors are growing frustrated with the price action and understandably so. However, if we step back a bit and analyze the situation, it’s simply a great buying opportunity.
Shares are currently down 38% from the February high. Let’s digest that for a second.
I have written several times now that growth stocks are capable of going on multi-bagger runs, doubling, tripling or returning even more on one’s investment. However, those same stocks are capable of deep, rapid corrections too.
Oftentimes, I look for high-quality growth stocks that have corrected 40% as an ideal entry point. With Baidu down 38% from its highs, it’s an opportune time to start taking a closer look.
A Closer Look
In tech, there’s the “Rule of 40,” which is a quick and easy way to measure a company’s growth and potential profitability. Investors use it as a way to identify potentially good investments.
My rule of 40 is more simple, as outlined above: Look for high-quality stocks that have fallen by 40% or more. I consider those bargain-bin opportunities. The key lies in identifying those “high-quality stocks” and separating the good from the bad.
In the case of BIDU stock though, the situation is more complex.
At the peak of its decline in late March, shares were down just over 50% — a true bargain. However, that was at the hands of Archegos Capital, which was quietly in the midst of a massive liquidation event.
Although BIDU stock has rebounded, there still seems to be a short-term worry about Baidu among investors. However, I think that event marked the low for Baidu, even if it takes a little while for it to recover further.
Breaking Down Baidu
The interesting thing about Baidu? While it has very solid growth, it’s not a high-flying growth stock with a high valuation.
The company is quite profitable, has solid top- and bottom-line growth and trades at about 21 times this year’s earnings. Despite that, shares have been hammered off the highs. High quality, but more mature growth stocks don’t tend to come down 40% like some of its higher-valuation peers. That only adds to my conviction in BIDU stock.
As the search engine of China, Baidu.com has become the world’s fourth most popular website. That’s not too surprising, given that Google.com is the most popular website in the world.
Analysts expect about 19% revenue growth this year, followed by estimates for 14% growth in each of the next two years. On the earnings front, estimates only call for about 6% growth this year, but a drastic acceleration to 20% growth next year.
While this year’s slow growth can be a bit of a turnoff, I think there’s another way to view it. First, the stock has come down enough to price in that slower earnings growth. Second, the company is still growing for the year and has solid revenue growth forecasts for several years. Lastly, the valuation is reasonable — and arguably, low.
For all of these reasons, BIDU stock seems like a bargain after the latest dip.
More Than a Search Engine
The best part of Baidu isn’t its growth, valuation or recent selloff. Instead, it’s what the company is doing to position itself for the future. Baidu is doing a lot of work in regards to artificial intelligence. It’s also making tremendous strides in autonomous driving with its Apollo business.
From CEO Robin Li: “As we enter 2021, Baidu is well positioned as a leading AI company with strong Internet foundation to seize the huge market opportunities in cloud services, autonomous driving, smart transportation, and other AI opportunities. We also hope to capitalize on our huge Internet reach with more non-marketing services.”
However, as well drill down into the autonomous driving side, the company says: “Apollo robotaxi and robobus fleets have serviced over 210,000 rides as of December 2020 … Apollo has been named the top Chinese autonomous driving company, leading its peers across all testing categories for the third consecutive year, according to the 2020 Beijing Autonomous Vehicles Road Test Report.”
But it’s not limited to just Apollo. Look at these ambitious plans to get into EVs: “Baidu plans to form an electric vehicle company and use its intelligent driving capabilities to power next generation passenger vehicles. Baidu has entered into a strategic partnership with leading automaker Zhejiang Geely Holding Group, owner of the Volvo and Geely Auto brands, to contribute its expertise in automobile design and manufacturing.”
All of this leads me to believe that buying this 40% dip is a good bargain based on current growth. But buying the dip now ensures that we have excellent exposure to what Baidu’s growth could be years down the road. And at the end of the day, that’s really what investing is all about.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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