Baidu, Inc. (BIDU) is a Chinese web services company which operates one of the world’s leading search engines. Beijing-headquartered Baidu, a.k.a. the Google of China, provides an index of more than 750 million web pages, 10 million multimedia files, and 80 million images. The company greatly benefited from Google’s (NASDAQ:GOOG) decision to exit a Chinese market, becoming an almost monopoly with no serious competitor left in the market.

As of August 30, Baidu stock was trading at $148 with a 52-week range of $76.04-165.96. It has a market cap of $51.8 billion. Trailing 12 month P/E ratio is 64,9 and forward P/E ratio is 34.2. P/B, P/S, and P/CF ratios stand at 29.6, 31.4, and 70.4, respectively. The three-year annualized revenue and EPS growth stand at 65.6% and 77.3%, respectively. Operating margin is 52.2% and net profit margin is 46.5%. The company has a low debt-to-equity ratio of 0.02. Baidu does not have a dividend policy.

Baidu has only two star ratings from Morningstar. While its trailing P/E ratio is 64.9, it has a five-year average P/E ratio of 83.1. Although it is a high-flier, out of 35 analysts covering the company, 27 have buy, four have outperform, three have hold, and one has underperform ratings. Wall Street has diverse opinions on Baidu’s future. The bottom line is 27.9% growth, whereas the top-line growth estimate is 84.1%. Average five-year annualized growth forecast estimate is 41.7%.

What is the fair value of Baidu given the forecast estimates? In this article, the 14th in a never-ending series, I will show a step-by-step calculation of Baidu’s fair value using discounted earnings plus equity model.

**Discounted Earnings Plus Equity Model**

This model is primarily used for estimating the returns from long-term projects. It is also frequently used to price fair-valued IPOs. The methodology is based on discounting the present value of the future earnings to the current period:

_{0}+ E

_{1 }/(1+r) + E

_{2 }/(1+r)

^{2}+ E

_{3}/(1+r)

^{3}+ E

_{4}/(1+r)

^{4}+ E

_{5}/(1+r)

^{5 }+ Disposal Value

_{0}+ E

_{0 }(1+g)/(1+r) + E

_{0}(1+g)

^{2}/(1+r)

^{2}+ … + E

_{0}(1+g)

^{5}/(1+r)

^{5}+ E

_{0}(1+g)

^{5}/[r(1+r)

^{5}]

_{0}(1+g)

^{5}/[r(1+r)

^{5}] = E

_{5}/ r

**Baidu’s Valuation**

_{0 }= EPS = ($2.20+ $4.32) / 2 = $3.26

Fair Value Estimator | ||

V0 | E _{0 } | $3.26 |

V1 | E _{0 }(1+g)/(1+r) | $4.16 |

V2 | E _{0}((1+g)/(1+r))^{2} | $5.31 |

V3 | E _{0}((1+g)/(1+r))^{3} | $6.78 |

V4 | E _{0}((1+g)/(1+r))^{4} | $8.66 |

V5 | E _{0}((1+g)/(1+r))^{5} | $11.05 |

D | E _{0}(1+g)^{5}/[r(1+r)^{5}] | $100.48 |

BV | Equals | $5.01 |

Fair Value Range | Lower Boundary | $139.70 |

Upper Boundary | $144.71 | |

Potential | -2.22% |

**O – Metrix Confirmation**

**What is the O-Metrix Score?**

- Baidu does not have a dividend policy. Therefore, the yield is 0.
- Growth estimate is the same as the discounted earnings model and is equal to 41.70%.
- Since we are at the middle of the year, taking the average of ttm (64.9) and forward (34.2) P/E ratios will smooth the results. Thus, the average P/E ratio to be used in the model is 49.55.

**Baidu’s stock has always been priced at a premium due to its high growth potential. The average P/E ratio in the last five years was 83.1. The stock is trading with a sky-high P/E ratio of 64.9, and a forward P/E ratio of 34.2. In the last five years annualized EPS growth was 132.51%. However, with a market cap of $51.8 billion, I do not expect the growth to keep its pace. Even if it does, this has already been priced by the market.**

**Disclosure:**I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.