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Hoang Quoc Anh
Hoang Quoc Anh
Articles (276)  | Author's Website |

Baidu Is Cheap Now

The stock is trading near its 52-week low

Over the last 12 months, Baidu Inc. (NASDAQ:BIDU) has dropped significantly, from nearly $280 per share to $152.4 per share at the time of writing.

As of December 2018, Baidu had $20.23 billion in cash and short-term investments. The interest-bearing debt (including short term and long term) was $9.44 billion. Thus, the net cash position was very high at $10.79 billion. With the share price at $152.4, Baidu’s total market cap stands at $53.3 billion. Thus, the net cash position accounts for 20.2% of the total market valuation.

Baidu Core is the company's main operating business, focusing on search-based, feed-based, other online marketing services and artificial intelligence. Despite facing increasing competition, Baidu still holds the leading position in China's search engine market. According to Statcounter, the company's market share stood at 66.25% in March. The second- and third-largest search engines, Shenma and Sogou, held 15.5% and 9.6% of the market.

The company invests in a lot of other technology initiatives, including iQiyi (NASDAQ:IQ), Apollo, DuerOS and Ctrip.com (NASDAQ:CTRP). Its 58% equity stake in iQiyi is worth more than $8.5 billion. Its 19% stake in Ctrip.com is worth $4.13 billion. So Baidu’s stake in iQiyi and Ctrip.com alone is worth total of $12.63 billion.

Currently, Baidu is worth $53.3 billion. If we subtract the iQiyi and Ctrip.com investments, as well as the net cash, Baidu’s core operating business is now valued at only around $30 billion. In 2018, the company generated $2.3 billion in operating profit. Thus, the true earnings valuation is only 13 times.

Investors have become more pessimistic toward Baidu as a result of a slowdown in growth. In fourth-quarter 2018, its core search and advertising business recorded a 14% year-over-year increase, much lower than the 28% and 25% growth in the second and third quarters. With the company growing at 14% per year and trading at 13 times earnings, the price-earnings to growth ratio is around 0.92, implying the market is valued cheaper than the company’s growth. Since 2013, Baidu’s PEG ratio has been in the range of 1.2 to 3. Thus, a PEG ratio below 1 is considered a good investment opportunity.

Apart from the core search business and the investments in iQiyi and Ctrip.com, Baidu invests in many initiatives, including autonomous driving and artificial intelligence. It recently announced the release of Apollo 3.5, the latest version of the open-source autonomous car platform, with more than 130 global partners, including BYD, Dongfeng, Daimler AG (XTER:DAI), Nvidia (NASDAQ:NVDA), Grab and Ford (NYSE:F). These technology initiatives give Baidu a lot of upside potential for the future.

Conclusions

Baidu has become a value play at its 52-week low. In addition, investors can benefit from its huge upside potential as the company is invested in many tech initiatives. In the short term, the share price might go lower, but can give investors a good return at this price level in the long run.

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About the author:

Hoang Quoc Anh
Chief investment strategist for the Global Hidden Gems Portfolio (https://ghginvest.com). Searching around the world for stocks that trade below net cash but are still profitable.

Visit Hoang Quoc Anh's Website


Rating: 5.0/5 (1 vote)

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Comments

Valuator
Valuator - 1 day ago    Report SPAM

Consumption is crashing in China, but value investors don't believe in economics, so it's OK.

Probably doesn't matter that China has a current account deficit, is cutoff from US export Dollars, capital controls, huge USD debt, and no more Treasuries. Do you think it matters that their reported banking system is 4x reported GDP? Ours was 1.3x before the Great Recession, when we lost $800 billion.

Buffett the pied piper has led you all to slaughter.

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