By Kevin Donovan
Baidu (BIDU), which derives its name from a poem written 800 years ago, is a Chinese language Internet search provider. It operates a Chinese-language search platform that includes websites and certain online application software, as well as Baidu Union, which is the company's network of third-party websites and software applications. Through links on its website, Baidu provides Chinese language Internet search services to enable users to find relevant information online, including web pages, news, images and multimedia files. It also provides a Japanese-language search service. With more than 70% market share in China’s internet search business, Baidu bestrides the People’s Republic like a colossus in the internet space. And it’s getting bigger.
Revenue and earnings per share grew 79% and 136%, respectively, in 2010. This year, growth rates are on track to hit 90% and 97% in revenue and EPS, respectively. Analysts forecast growth in those two metrics of 51% and 52% in 2012.
Baidu trades at about 46 times trailing 12-month earnings, and its PE to growth ratio is about 0.79, compared with about 1.00 for the sector, suggesting the potential for share price appreciation if growth expectations are met.
By comparison, Google (GOOG) trades at about 22 times earnings and a 0.89 PEG. Currently at a price of about $117 per American Depositary Share, Baidu’s 52-week range is $96.53-165.96.
China has the most internet users of any country in the world, but it is far from the saturation point seen in more mature markets. The company estimates there are some 477 million internet users in China, just 36% of the population. In the United States, internet penetration is 78%.
Baidu is looking for growth in other technology areas, too. The company recently signed a deal with Dell Computers (DELL) to provide the software for the U.S. computer-maker’s smartphone in China. This would pit it against Google’s Android operating system, which garners the lion’s share of the smartphone market in China.
This is but one risk that threatens the stock. Chief among them is the potential for government interference in the private sector. Like all Chinese companies, Baidu can be whipsawed by the whims of government fiats. Indeed, U.S. companies engaged in information sharing -- Google is the prime example -- can find the prospect of censorship and the threat of government snooping stifling.
Another risk is the perception of accounting integrity. Chinese stocks were punished earlier this quarter when it was reported the U.S. Justice Department was probing the accounting practices of Chinese companies trading on U.S. stock exchanges. Baidu wasn’t spared in the ensuing selloff, though it has bounced back since. Nevertheless, the news highlighted transparency issues that worry some investors.
Also, the macro environment could take a turn for the worse. Chinese economic growth has lost momentum, and slower economic growth could spell slower growth for internet companies like Baidu.
According to Baidu’s English language website, the Song Dynasty poem from which it takes its name
compares the search for a retreating beauty amid chaotic glamour with the search for one's dream while confronted by life's many obstacles.
‘…Hundreds and thousands of times, for her I searched in chaos, suddenly, I turned by chance, to where the lights were waning, and there she stood.’
Baidu, whose literal meaning is ‘hundreds of times’, represents a persistent search for the ideal.
In sum, I believe Baidu is an appropriate buy for growth investors with a healthy appetite for risk, not to mention a taste for Chinese poetry.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
