What To Do With Baidu's Stock

Jul.25.13 | About: Baidu, Inc. (BIDU)

Another quarter, another strong earnings report from China-based Baidu (NASDAQ:BIDU). The company reported net income of 2.64 billion yuan ($431 million), beating analyst estimates of 2.6 billion-yuan. Revenue rose 39 percent to 7.56 billion yuan; the stock was up close to 10 percent in early Wall Street trading, still well-blow its 2011 high of $160.

Baidu's stock has been held down by a negative environment for Chinese equities-iShares China (NYSEARCA:FXI) has been down close to 20 percent in 2013. But after gaining close to 40 percent in the last three months, the question is whether the market has already discounted the good news, and whether investors should take money of the table.

The answer depends on the investment horizon of each investor. Short-term investors may want to take some money off the table. Long-term investors may want to stay with the stock, as the company continues to take strategic initiatives to strengthen its competitive position in the Chinese on-line market. Recently, the Baidu acquired app maker 91 Wireless for $1.9 billion. This move will allow Baidu to expand the scale and scope of its operation, adding 3 percent, according to Citigroup's analyst Muzhi Li.

With 560 million Internet users spending 20 hours a week on line, China is by far the largest Internet market of the world, more than twice the size of the US market. The trouble, however, is that the Internet market is a brutal market, where most companies fail to monetize their business model. But there is an exception to this rule: Early movers that have amassed economies of scale and scope, as is Baidu. The company's revenues have been growing by leaps and bounds; reaching $3.83B in 2013, up from $515 million in 2008. Most notably, revenues come from several sources: Internet search, where the company holds a 70 percent market share; video stream (iQiyi); on-line travel services (Qunar); on-line recruitment (Baijob); and on-line payment systems (BaiduPai).

Simply put, Baidu is the Google (NASDAQ:GOOG), the Netflix (NASDAQ:NFLX), the LinkedIn (NYSE:LNKD), the Priceline.com (NASDAQ:PCLN), and the eBay (NASDAQ:EBAY) of China; and is trading at favorable financials, compared to both its US and Chinese peers-see tables below. Baidu has a PE of 12.71 compared to a 16.63 for Google; and an operating margin of 46.52, well above those of its American and Chinese counterparts.

Financials of US web companies

Company

Total Revenues

Forward PE

Operating Margins

Google

$53.5B

16.63

25.3%

Netflix

3.76

78.29

2.23

LinkedIn

1.11

96

6.31

Priceline.com

5.53

19.16

34.71

eBay

15.02

16.25

21.06

Click to enlarge

Financials of Chinese web companies in late April 2013:

Company*

Business

Forward P/E (Dec. 2014

Operating Margins

Baidu, Inc.

Internet search engine

19.82

44.02 (%)

Sina Corp.

Media and mobile value-added services

36.19

22.30

E-Commerce China Dangdang Inc.

Business -to-Consumer e-Commerce

--

-9.42

Renren Inc.

Social Networking

--

-52.09

Youku

Internet TV

15.62

-25.02

Sohu.com Inc.

Brand advertising, on-line gaming

14.82

23.15

Click to enlarge

Source: Yahoo.finance.com

A few worlds of caution: As is the case with other private companies in China, Baidu's business is at the whim of the government that can change the rules of the game at any time, turning winners into losers. Baidu's financials should be interpreted with caution, as Chinese accounting standards are different from those of the U.S. - so they aren't comparable with those of their U.S. counterparts.

Disclosure: I am short NFLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Long EBAY