There has been a recent influx of companies operating in the internet space, causing the industry to become quite crowded. This can cause the task of finding a stock to invest in within the internet industry a rather difficult task. There are numerous United States based companies which operate both domestically and globally, but I've found an interesting stock that operates solely outside of the U.S. This stock is none other than Baidu Inc (NASDAQ:BIDU) - the Chinese based internet search provider. Rather than investing in a U.S based company such as Google Inc (NASDAQ:GOOG) or Yahoo! Inc. (NASDAQ:YHOO), I feel that Baidu provides investors with an interesting growth opportunity. The following article is my case for investing in Baidu.
About the Company
Baidu Inc. is a Chinese based internet search provider who serves three types of online participants- users, customers, and Baidu union members. Baidu offers a Chinese- language search platform which allows users to find information online such as web pages, images, and other various media forms. The company generates the majority of its revenues through its online marketing services. This marketing service allows small and medium sized enterprises, Chinese corporations, and Chinese subsidiaries of large multinational companies to better reach their targeted customer via online advertisements. As of December 31, 2010 Baidu had 412,000 active online marketing customers.
Baidu operates in the growing industry of Chinese internet. The country has the world's largest internet usage population - nearly 500 million people. To help meet the information demands of this growing population Baidu offers a plethora of online tools, some of which are very similar to the global search giant Google Inc. For instance Baidu offers something known as "Baidu Map Search," which is very similar to Google Maps in that it allows users to access online maps of many large cities and allows users to find particular points of interest such as hotels and movie theaters. Baidu also offers a service called "Baidu Wenku" which allows users to upload and download user-created files such as Microsoft Office products. Once again this is a very similar function to that of Google Docs which also allows users to upload and download files within a collaborative work space. Baidu has also moved in to the mobile space by offering "Baidu Mobile Search" and "Baidu Palm," both of which allow smartphone and tablet users the ability to gain access to all the Baidu tools and functions while on their mobile device. Clearly Baidu has a very wide range of product offerings, which allow their users to access a broad range of tools and utilities and multiple platforms.
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Baidu has very profitable and efficient operations. Their gross profit margin of 73.11% is very strong and far above the industry average of roughly 55%. The strong gross profit margin is mostly due to the fact that as a web based company they have very little overhead- the majority of their cost of revenues are associated with bandwidth and traffic acquisition costs rather than labor and raw materials. The company has also worked very hard on lowering its overall operating expense. For example over the past three years Baidu has been decreasing its Operating expenses as a percentage of revenue, from 64% in 2009 to 48% in 2011. For these reasons the company has very efficient and profitable operations which far exceed the industry averages.
Price to Book Ratio
Price to Sales Ratio
While Baidu is clearly a business with very profitable and efficient operations, their shares are also trading at a very fair valuation which could even be viewed as "cheap" by some standards. The stock is trading at roughly 45 times earnings, which is slightly higher than the industry average, but taking the company's future earnings growth into consideration the stock has a PEG ratio of just .93. This ratio is far below the industry average, and below the number 1 as well, signifying that the stock is trading relatively inexpensively in comparison to its growth. While the company is trading fairly inexpensive to its growth rate, it is on the other hand trading at a high valuation to its underlying book value and sales per share. While the company is trading at a high valuation relative to its underlying book value and sales, the street will more than likely remain focused on its growth rate. Therefore if Baidu can continue growing revenues and income at this pace, their shares will continue to remain undervalued, but if they do not keep pace then their shares will become quite overvalued.
One of the largest risks to Baidu's stock is its own country. The Chinese national government has numerous regulations in place regarding material censorship which Baidu must abide by. Failure to follow these regulations could have a materially negative impact on Baidu's business and of course on shares of BIDU as well. One of the major risks associated with these regulations is the ambiguity surrounding the Chinese government's regulations. The company lists numerous times throughout its Annual Report that this is their biggest risk- whether or not their current operations are even in compliance with government regulations. To me this is the largest caveat when it comes to investing in Baidu. Although the company has strong operations and a fair valuation there are still a lot of "what- if?" scenarios when it comes to the rather broad government regulations which Baidu must follow.
The one drawback to investing in shares of BIDU is the large amount of government regulations which the company must abide by. This is a huge risk, as the regulations force Baidu to closely monitor the content they provide and could have a negative impact on the company's operations if they fail to do so. However on the bright side the company has been around since 2000 and has had no real problem following these regulations to date. Overall I would consider shares of Baidu to be a buy, as the company has very efficient operations, a strong and vast product line, and a favorable share price valuation based on current growth levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.