Stock of the Day
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Baidu (BIDU)
Baidu -- Are We Looking at a Chinese Bubble?
Baidu, the dominant search engine in China, is back to trading at pre-financial crisis levels. The stock (i.e. the ADRs) was trading around $345 on August 1st of last year, then fell all the way to $100 and now has rebounded back to $327. That is quite a ride, who said stock markets are rational? There is no clear driving force behind this volatility, the explanation on the street seems to be that during the financial crisis, the motto was sell first, ask questions later and over time, traders realized that the economic climate in China didn't worsen as much as expected and therefore, the original thesis behind Baidu is still valid -- i.e. it's the dominant player in the lucrative market of search engine advertising in one of the world's biggest and least penetrated markets. But given how capricious traders have been in valuing Baidu, one has to ask -- is there too much hot air in Baidu's current valuation level?
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| Stock Analysis |
The following would make good arguments in support of Baidu -- a. the Chinese search market has a potential audience of well over a billion and it hasn't been deeply penetrated, there are still an awful lot of eyeballs that are not searching online yet. The market grew 47% last quarter to $2.6 billion. Expect to see growth rates like that for a long time. A lot of retailers there have not even thought about advertising online yet. b. Google (GOOG: Charts, News, Offers) is like the Tiger Woods of search engines. There are not many weaknesses but there are a few (e.g. driving accuracy). China is one of those soft spots for Google. Baidu has about 70% of the market in China while Google only has around a 20% share. Baidu is able to come up with more relevant local results. And c. Baidu has the ref on its side. The Chinese government is notoriously fickle and meddles with private businesses regularly. Naturally, the government is more inclined to see Baidu do better than Google and policies and rules can be structured to meet that objective. Google should expect to be frequently asked to revise its algorithms and jump through hoops.
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And conversely, if you are looking for a reason to stay away from Baidu, consider the following -- a. Google has a lot more resources at its disposal. It can throw tons of money at the Chinese market and improve the quality of its local results. It can hire more salespeople and offer larger discounts to the big advertisers. China is too big a prize for Google or any other competitor to ignore, so Baidu always has to have its guard up. A few years ago, Google's share of the Chinese market was 2%, now it's close to 20%, so there has been progress made. b. Baidu is not as sophisticated as Google. Baidu is currently touting a new advertising framework, dubbed Phoenix Nest, which it believes will have a significant upward impact on revenues. How you may ask? By more clearly differentiating paid advertisements from natural search results and by giving advertisers new tools to better track their ad dollars. This sounds like stuff that Google had ages ago. Baidu is clearly behind on the technology curve. c. Consider Baidu's valuation at current levels -- its current P/E ratio is a whopping 64.71. Google is trading at a P/E of less than half that at 30.90.
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Each investor will probably weigh the factors listed above differently, but overall, we think Baidu hasn't done enough to earn its current valuation.
A couple of other things to look at:
An insider's perspective on Google vs Baidu
Baidu's latest profit report -- 37% increases in revenues
Keep an eye on Baidu's competition -- WSJ is concerned about Baidu's valuation too
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Profile |
Click here to view a detailed profile of Baidu.
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