There are several stocks that have steeply declined in the recent market meltdown, and any stock related to China has seen significant carnage. For China equities and for global equities, the recent correction provides a good opportunity to accumulate some quality stocks in small quantities.
Baidu (BIDU, Financial) that has corrected from recent highs of $218 on Nov. 30, 2015 to current levels of $153. The 30% correction is an excellent opportunity for long-term investors to consider exposure to Baidu. With the stock surging by 8.2% in last trade, I believe that Baidu has bottomed out and some recent news related to the stock provides further upside momentum.
It has been reported that Baidu has received non-binding proposal to acquire all the outstanding shares of Qiyi for an enterprise valuation of $2.8 billion. The video platform Qiyi was started in 2010 with investment from Baidu and Providence Equity Partners. Later in 2012, Providence Equity Partners' stake was acquired by Baidu. With the stock surging by 8.2% in last trade, the market participants seem to be positive on the potential divestment of Qiyi.
Baidu also remains an attractive long-term investment from the perspective of the potential that the company’s search business holds. China’s internet connectivity and usage has been growing at robust pace even in the current economic scenario, and this is positive for Baidu.
I must also mention here that mobile internet usage is increasing and is likely to trend higher in China in the coming years. From that perspective, mobile content monetization is critical for Baidu, and the company’s mobile revenue has been steadily increasing as a percentage of total revenue. Therefore, with market leadership (by a long way) in China’s search engine market, Baidu has been making the right moves from the revenue growth front.
Besides the search engine business, Baidu entered into a share exchange program with Ctrip on Oct. 26, 2015 and by way of this transaction, Baidu now owns 25% of Ctrip's aggregate voting interest. Ctrip is a travel service provider of accommodation reservation, transportation ticketing, packaged tours, and corporate travel management in China. While the business is unlikely to have a meaningful impact on valuations currently, I expect big growth potential for this business in the long-term.
Another point that is likely to result in sustained upside momentum for Baidu is the likely expansion in net profit margin in the coming years. According to analyst estimates, the company’s net profit margin for FY 2015 is likely to be 27% and for FY 2016 at 33.6%. Further, the company’s cash flow to sales is likely to increase to 55% in FY 2016 from 50% in FY 2015. These points imply that the company’s valuation will be attractive from a forward looking perspective and the correction is therefore a good buying opportunity.
It is also important to note that Baidu has been active on the inorganic growth front and the company’s financial flexibility is robust for inorganic growth. Considering the deep correction in the last three to six months coupled with the promise the search business holds, Baidu is certainly worth considering for the near term as well as for the long term. I expect the stock to trade at meaningfully higher levels with a three to five-year investment horizon.
Disclosure: No positions in the stock.
