After Falling 15% Is Baidu (BIDU) A Buy?

Investors in Baidu (BIDU) have lost confidence in the company after it reported second quarter earnings last week. This resulted in the company's shares falling by 15% and shedding $10 billion in market value. Since the start of the year, Baidu is down over 30%.  Baidu has been experiencing stiffer competition in China from newer competitors like Qihoo 360 (QIHUand older competitors like Sohu (SOHU).  Both of these competitors have gained market share over the last few years.
With Qihoo 360 and Sohu  gaining 18% and  10% market shares at the expense of Baidu.  This has caused Baidu market share to fall from 80% to 63% over the last few years. Investors are worried that Baidu will continue to lose market share to its competitors. They are also worried that operating margins and earnings will continue to contracted.  Investor believe  that management is always leading from behind and play catch up to its competitors. I believe investors in Baidu are overreacting  to the second quarter and third quarter guidance.  Investors aren't  giving credit to management for their ability to maximize revenues from search, and control cost effectively. By the end of the second quarter, the company has $12 billion in cash and is equivalent on its balance sheet. Yes, the company is experiencing stiffer competitions, but that doesn't mean that Baidu is going to loss its dominates over the Chinese Market.

Investors, and the market as a whole aren't putting Baidu's second quarter results or its third quarter guidance in context.

Second Quarter Operating Highlights:Second Quarter Financial Highlights:Baidu saw revenues increased by 38% while sales, administration and expenses increased by 81% during the second quarter. The company saw a larger  expenses increase more than its expected. This increase in expenses resulted in operating margins sinking 21%. Baidu had operating cash flow of  $776 million  during the second quarter. The company's operating margins would have been 40% instead of 20% and its operating earnings would have been $1 billion instead of $55o million. Investment in the second quarter reduced operating margins and operating earnings by 38% respectively. Baidu believes that revenues for the third quarter will come in between $2.93 to $2.99 billion.

Investors, and the market as a whole, are overreacting to Baidu's second quarter earnings and third quarter guidance. They believe that Baidu's competitors are hurting the company and growing their market shares. They're right, Baidu's competitors are growing their market shares at Baidu expense. Qihoo 360 and Sohu have both gained 18% and 3.5% over the last few years in market share. During this same period, Baidu market share has dropped from 80% to 60% of the search market in China. The company may have lost some market share within the last few years, however they still controls 85% of revenues from search ads. Baidu is marvelous at maximizing revenues from search ads.

After shares fell by 15%, Baidu announced a $1 billion share repurchase program for the next 12 months. With the company being a net buyer of its shares for the next 12 months, this will likely prop up the company's share price. Investors in the company are overreacting to headwinds that Baidu faces and are overestimating Baidu competitors. At its current price, Baidu is selling at fair value and offering a forward rate of a 44% return going forward. An intelligent investor has the change to invest in Baidu at a lower price than $170/share.
Published on Aug 5, 2015
By Cody Eustice
Cody is a freelance writer who has been writing financial articles for various sites for over a year now. He is a value investor looking for companies that sell for far less than their estimated business value.

Copyrighted 2016. Content published with author's permission.

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