Baidu (BIDU, Financial), the foremost search engine in China, disappointed stockholders in 2015 and this year as well. But it is worth noticing that the company trades at just 11.2x trailing earnings, significantly lower than the industry average of 50 for internet information providers. Throughout the past few quarters, the company’s revenue has been growing at an average of more than 35%.
In the most recent quarter, Baidu shared earnings per share of $1.49, beating analyst estimates by a huge margin. On the other hand, the company’s revenue was $2.73 billion, exceeding estimates by $20 million, but representing a drop of 0.7% year over year.
The primary reason for the plunge in Baidu’s top-line growth was additional strict regulations about ads for pharmaceutical products as well as health care services. The sale of its stake in Qunar also negatively impacted top-line growth.
The company has made huge investments in integrating online-to-offline services such as ride-hailing and mobile payments into its smartphone application which could possibly start paying off going forward. As a result, the company’s long-term prospects still look bright; it is projected to display strong growth next year.
Moving ahead, it is well-known that the automotive sector is growing at a rapid pace and Baidu is putting in a lot of effort to bring driverless cars on roads within the imminent five years.
Unlike Alphabet (GOOGL)'s Google, the company has strategized to outsource the production of autonomous vehicles to prevailing auto manufacturers, with the goal to launch its first vehicle in 2018. In 2015, the company started testing its driverless car technology on a number of BMW 3-Series GTs.
Moreover, the company established a driverless tech research center in Silicon Valley this year, with the objective of testing out self-driving vehicles in the U.S. in the near future. It is also investing massively in other artificial intelligence based areas like speech and image recognition, big data and robotics.
Summing up
Baidu's 11.2 price-earnings ratio clearly suggests that it is undervalued. It appears stockholders are concerned about the near-term headwinds, but they should also keep in mind that it is in a great position to gain enormous benefits from the growth of the autonomous car market.
Baidu’s stock price has declined considerably from its all-time high, which looks like a great entry point for long-term investors. Baidu is a strong buy at the current market price.
Disclosure: No position in Baidu.
