By Ahmed Ishtiaq
Baidu, Inc. (NASDAQ:BIDU) is a Chinese web services company that operates one of the world's leading search engines. The company is also known as the "Google of China." Baidu greatly benefited from Google's (NASDAQ:GOOG) decision to exit the Chinese market, becoming a monopoly with no serious competitors left. Baidu's search services allow users to find appropriate information, news, webpages, images, documents, and multimedia files through the links provided on its websites.
At the start of April, the stock was trading just above $140 after a great start to the year. However, BIDU was not able to maintain its price above $140, and it is currently trading close to $96. At the moment, the stock is trading at a slender discount compared to the industry. It has a P/E ratio of 21.6, compared to the industry average of 22.6. However, based on P/B and P/S ratios, the stock is substantially overvalued. It has P/B and P/S ratios of 9.0 and 10.3, respectively.
The company announced its third-quarter earnings on Oct. 29 and reported disappointing revenue figures, causing a decline in the stock price. Baidu also gave lower-than-expected guidance ($979 million to $1.01 billion) for the fourth quarter. Growth in earnings is forecast to be incredibly high for the company over the next five years. Analysts expect Baidu to grow its earnings by an average of nearly 42% a year over the next half-decade. At the moment, the company is focusing on moving to mobile devices. Given the market position of the company in the region, it should be able to dominate the mobile advertising market. In the most recent earnings announcement, CEO Robin Li said that over 100,000 developers have already joined the Baidu platform. Furthermore, a new mobile browser by Baidu is already a hit with its users. The browser has attracted over 12 million users in the first month of its launch. Baidu holds over 70% of the market share in China.
New Bond Issue
Baidu has recently sold $1.5 billion worth of five- and 10-year bonds. The bonds were marketed to high-grade debt investors in order to raise the money at a lower cost than emerging markets. These bonds were priced at a spread of 160 basis points over Treasuries for the five-year, and 185 basis points over Treasuries for the 10-year. The company intends to use the funds raised through the debt offering to refinance some of its short-term debt. However, the remaining portion will be kept for potential acquisitions.
Recently, there has been speculation that the company is considering the acquisition of mobile businesses. Baidu may be targeting companies in mobile businesses for expansion as users travel from PCs to mobile devices such as smartphones. As a result, the stock has come down. Investors believe that these acquisitions will not be profitable in the immediate future. A lot the players in the industry are moving to the mobile market, but no one has been able to earn money from the market yet. Baidu is currently experimenting with its business model, and the company is yet to find the best strategy to make money from the mobile market. However, a substantial portion (25%) of the research and development budget for the company goes to the mobile segment.
Debt to Equity
At the moment, the stock is trading at a small premium compared to its competitors. Only SINA Corporation has higher P/E ratio than Baidu. However, Baidu beats all of its competitors on profit margins and growth. Furthermore, the ROE for Baidu is also better than all of its competitors, but the company has a higher debt-to-equity ratio. However, the debt-to-equity ratio is very small, and it should be manageable for the company.
Baidu has massive growth prospects due to its huge size and market-leading position in one of the biggest markets in the world. Based on the expected growth rate, the stock has a PEG ratio of just 0.56. On the other hand, competitors like Google and Sohu have far higher PEG ratios at 1.33 and 1.30, respectively. Due to the recent speculation about acquisitions, Baidu stock has come down and provides a great opportunity to buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.