Baidu Has Massive Growth Trends Firmly in Its Grasp

We were not fully prepared for the sharp sell-off in Baidu (BIDU) stock on Tuesday when BIDU opened up in the $360 range, down from the $430 level where it closed on Monday. As the Google (GGOG) of China, the stock has a short and compelling positioning that many would say make it a “must own” kind of name. Of course it trades at a high valuation based on conventional metrics.

This was a perfect time to put our Intrinsic Value (IV) model to work. Our IV for 2010 came to $496 which is what we tend to use to capture a one year return view on a stock. With current trading around our 2009 value of $372, it was a perfect opportunity to add shares to the model portfolio.

After we completed the work and added in some other factors, our conviction level became quite high. BIDU has a TEV a bit above $14B. Compare that to Google with a TEV of $153B. Of course Baidu is at an earlier stage of development, but they continue to dominate search in China.

Unlike other parts of the world, China is not going to let Google get a majority market share there, not unless the revenue stays in China. The Europeans have realized first hand how devastating it can be. Today billions and soon tens of billions of advertising dollars will be flowing out of Europe and into the US-domiciled Google. Nobody in Europe is happy about it and the concerns are getting more acute.

Although China is a puzzle of good and bad, the fact is that Baidu is in a very strong position to grow into higher valuations even from our current IV of $496. At current growth and profitability trajectories, the shares will be over $600 in 2011.

Google has transitioned through some different versions of their online system before and even guided investors to very low “seasonal” results in some past summers. Post these short-term cautions, the stock has done extremely well. These are companies that have massive secular growth trends firmly in their grasp. When the IV is attractive these stocks should always be on the top of your “buy list.”

Although the shares have bounced ,we are not suggesting we know where they will trade in the short term, only that the company is worth $496/share in the next 12 months and $650 per share in the next 24 months.

Disclosure: Our Research 2.0 model portfolio added BIDU as a position Tuesday.

Comments

[Fibozachi]

You say that "we are not suggesting we know where they will trade in the short term, only that the company is worth $496/share in the next 12 months and $650 per share in the next 24 months." If you don't how or why BIDU's price action develops then how could you know where it will be, ever?

"Worth" is a very interesting term; outside of how obviously awesome! BIDU is, why would it be "worth" what you suggest? What funny-mental valuation metric is that based upon? How could you extrapolate such "value" from their decelerating growth rate and already high institutional sponsorship?

Moreover, you say, "We were not fully prepared for the sharp sell-off in Baidu (BIDU) stock on Tuesday when BIDU opened up in the $360 range," and "we are not suggesting we know where they will trade in the short term." You tell us what you think but why do you think it? Stringing words together does not add up to a number.

We at Fibozachi thought that BIDU plotted an historic peak print during the first 20 minutes of Monday's open, so we extensively detailed various methodologies of comprehensive technical analysis alongside several a fully annotated charts, which includes a full Elliott Wave labeling at
fibozachi.com/technici...

.... For BIDU, we must draw a simple trendline that connects the top of what Elliott Wave practitioners would call wave 3 and wave 5 and another trendline that connects the bottom of what Elliott Wave practitioners would call wave iv of 3 and wave 4. Now, by looking at where those two trendlines will converge, circa the week of November 13-20, in relation to where the rising wedge triangle pattern (an ending diagonal in Elliott-speak) began, we can see that BIDU is approximately 75% of the cumulative distance to the apex of our pattern. Therefore, BIDU gapping decisively lower on the open should NOT have come as a surprise to any technician with a robust knowledge of the Elliott Wave methodology ....

2009 Oct 30 08:23 AM

[redstwok]

Everyone is assuming BIDU is "GOOG of China", and it keeps coming up as the central theme of buying BIDU no matter what the performance of the company and where the stock is priced. But as a fundamental driven investor, I must look deeper. The pciture is not pretty as the headline suggest.
BIDU

2009 Oct 30 08:44 AM

[Mad Hedge Fund Trader]

ndtt ) If you think Google (GOOG) has a great future (click here for my recent update at www.madhedgefundtrader... ), then you’ll love Baidu (BIDU), which is Google on Viagra. With economic growth for China exploding a sizzling 8.9% in the recent quarter, it can mean only one thing for the Chinese Internet provider. The business for banner ads is booming, and with that comes expanding margins as economies of scale kick in. I have been pounding the table, trying to get readers to buy Baidu since December, when it bounced off $100 (click here for my recommendation at www.madhedgefundtrader...). Since then the stock has rocketed to $438. It is not exactly cheap here, but what multiple do you put on a hyper growing company in the world’s hottest economy? If you do play, I would suggest a limited risk vehicle in case someone soon stuffs some smelling salts up the noses of the global equity markets. Outright call options are too expensive for this bad boy, so cut your cost with a 1:1 call spread involving a long near money call against a short out of the money call. Use this 20% pullback to become a Baiduphile.

2009 Oct 30 08:54 AM

[redstwok]

Got cut off above.
BIDU's customer growth has dropped off steeply from 40% y/y growth to 11% growth in 3Q, and guided to 8% growth in 4Q. This is tepid for the supposed dominate search enginer serving a country where internet population is growing at above 20% this year. BIDU is getting majority of its growth from raise key word prices (up 25% y/y in 3Q). Price increases that are materially above GDP / CPI / PPI is unlike over long term. So where will the growth come from?
Most bulls of the BIDU continue to say "where would they go" comment when it comes to near term weakness. In China, there are actually many alternatives. Aside from GOOG China, Sousou, and other regular search engines, the biggest threat to BIDU is the Alibaba Group, namely Taobao. Taobao runs the largest and fastest growing online martket in China, and has a robust search engine. It's derives revenue from advertising and not from listing fees. It's clear from its growth that SMBs are turning away from BIDU and going to a more cost effective alternative.

2009 Oct 30 09:10 AM

[Canadian Red Neck]

If my understanding is correct, Google makes its money from on line advertizements. I like to ask, "Does on line advertizement work?" I almost never look at those advertizements. Anyone of those that popped got closed immediately.

I actually read newspaper advertizements and flyers when I was looking to buy something. I can't recall an incident that I bought something because I saw the online advertizements. Same goes for TV advertizements.

So, basically I ask whether a company that depends exclusively on revenue from online advertizement is sustainable.

2009 Oct 30 03:27 PM