- There remains substantial price upside despite Baidu's significant price appreciation of 94% in the past 12 months, exceeding S&P 500's 20%.
- Mobile growth momentum should persist in 2014 driven by the company's established mobile infrastructure, secular mobile advertising tailwind, and management's continued investment.
- The stock trades at just 1.1x PEG, and inexpensive valuation relative to S&P 500's 1.6x.
The share price of Baidu (NASDAQ:BIDU) has appreciated by 9% since I wrote my last article on the stock in January 2014. Looking forward, I believe there remains a substantial price upside as the company's current fundamentals and growth prospects still look robust and the stock's valuation continues to be inexpensive.
The company reported Q4 2013 results in late February with quarterly revenue growing by 50% year-on-year. The brightest spot was the substantial mobile revenue growth. The mobile revenue mix has doubled from just 10% in Q2 2013 to 20% in Q4 2013. I expect the mobile growth momentum to persist in 2014 given the following reasons:
- Baidu's mobile platform in China has over 100M active users and its mobile distribution channel is ranked No.1 in the country with approximately 40% market share. The company currently has 14 mobile products spanning from various major internet fields including app distribution, online searching, internet browsing, and video browsing. It is believed that the significant scale of Baidu's mobile infrastructure should continue to support the company capturing market share and driving continued mobile growth over a long term.
- Management indicated that almost all of the company's advertising customers have allocated budget to mobile searching. Given consumers' ongoing adoption of mobile devices, better user experience offered by mobile platform, and the fact that Baidu continued to see market share in search traffic increase in the past 6 months from 71.4% in July 2013 to 72.9% in January 2014, the trend is expected to continue.
- According to EnfoDesk, mobile gaming market in China experienced considerable growth of 123% in 2013 and has become the key driver of mobile internet monetization next to mobile searching. Given Baidu's significant exposure to mobile gaming market through its No.1 mobile app distribution platform (approximately 4% of total revenue), the continued strong growth in mobile gaming revenue in 2014 would have meaningful impact on Baidu's top line.
- In the Q4 earnings call, management expected almost no growth in profits in 2014 as it would be another investment year for the company. This implies that operating margin should turn lower given the anticipated revenue growth in 2014. Management also noted that a majority of the investment in 2014 will focus on channel and marketing for mobile products (e.g. pre-installation of mobile apps and offline advertising). Given the success of Baidu's previous mobile investment cycle which has led to today's achievement, I believe the upcoming investment round should bear fruit in late 2014 and 2015.
One key point that might be overlooked by some investors is Baidu's 55% ownership in Qunar (NASDAQ:QUNR), an online travel ecommerce platform in China with a market capitalization of $3.6B. Although competition in online travel vertical remains intense due to a number of players in the market, I believe Qunar to have a high potential to become a leading player in the travel vertical given that:
- Qunar's Q4 2013 revenue increased by 74% year-on-year, exceeding consensus estimate, and its mobile revenue mix rose from 15% in Q3 2013 to 20% in Q4 2013;
- Qunar management is committed to continue investing heavily in product development and marketing, which is supported by $300M credit facility offered by Baidu; and
- The travel website has also been cooperating with Baidu through exclusively operating Baidu's travel search platform (e.g. Zhixin travel) to boost user traffic.
Baidu now trades at 23.8x estimated 2015 EPS, which is at 49% premium over the same multiple of S&P 500 Index at 15.9x. However, after accounting for the company's consensus long-term earnings growth estimate of 21.6%, compared to the average estimate of just 10% for S&P 500 companies, Baidu only trades at 1.1x PEG, representing a 31% discount to S&P 500's 1.6x.
In summary, as Baidu would likely continue to see strong mobile growth in 2014 and beyond while it still trades at discounted valuation on PEG basis, the stock is a solid buy.
All charts are created by the author, and data used in the article and the charts is sourced from S&P Capital IQ, unless otherwise specified.