Baidu Is Extremely Undervalued
Buying great companies on massive pullbacks is one of the keys of successful investing, which is why I think optimist investors should see Baidu’s (BIDU) recent drop as an attractive opportunity. Chinese companies have a reputation of having bubbly valuations, however, I think Baidu is too cheap to ignore.
Baidu’s prospects in China
The Chinese internet advertising industry is growing fast. iResearch has forecasted that it is going to grow at a CAGR of 28% through the 5 year period between 2014 and 2018.
Although maturity of the market and the general macro-economic disturbances can act as roadblocks and cause some deviations in the growth trajectory, the market should still grow at a rapid pace. Given than Baidu is a prominent leader in this space, the company stands to benefit considerably from this trend.
In addition to that, other segments of this market will also flourish.
Baidu’s full year 2015 revenues were RMB66.382 billion ($10.248 billion), representing a 35.3% increase from 2014. The revenue growth expected by iResearch between 2014 and 2021 for Baidu is from $5.7 billion to over $30 billion, assuming that it maintains the current market share. That calls for a CAGR of about 27%, which is very impressive.
Considering the growth estimates, shares of Baidu are currently undervalued. Baidu is trading at 10.68x trailing earnings. Usually, a tech stock that has a 20% expected growth rate from two years commands a P/E ratio of over 20. Moreover, Baidu looks a lot cheaper if you take into account the company’s net cash of $5 billion. All in all, Baidu is extremely undervalued for a growth stock.
Baidu Inc., the Chinese web services company, leads the Chinese search engine market and owns 80% of the Chinese market by revenue. This industry in China, especially the search advertising market, is booming. And because Baidu is the undisputed market leader, its ability to capitalize heavily on the future growth within the Chinese internet search market is also undisputed.
However, this market is not growing without any growth in competition. There are several new entrants lined up to maximize their share of this rapidly growing pie. However, even if Baidu loses market share to rivals, it will remain the leader and benefit most from the aforementioned trends.