Baidu: A Train Heading for Derailment? 23 comments
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Baidu's (BIDU) valuation is reminiscent of the era circa 2000, just before the dotcom bubble popped. Do you recall analyst Henry Blodget’s (of Merrill Lynch fame) bold Yahoo (YHOO) price target of $425 when YHOO shares were near the $300 mark? It turned out to be a disastrous call, as YHOO’s share price subsequently plummeted by more than 95% to the $10 area.
Citi recently raised its opinion on BIDU from a hold to a buy and increased its one year price target from $350 to $415. What good is it to get an upgrade after the shares have almost doubled in the last month from the low $200s? Baidu's shares have risen too far in too short of a time and, as a result, are severely overbought and due for a subsequent correction. Citi’s upgrade is too late; they should have issued the upgrade before the big move. I’d be leery of analysts' recommendations, as I expect that they sometimes have a “hidden agenda” in effect. Over the past year, analysts have been raging bulls on Baidu, with seven out of their last ten actions positive; Canaccord Adams was the lone bear with a sell rating in place.
At a market cap of nearly $13 billion, this stock is worth more than most of the U.S. air carriers combined, as Jet Blue (JBLU), United, Delta (DAL), Northwest (NW) and AMR’s (AMR) market cap shared is less than $12 billion, yet these airlines are estimated to generate 09 revenues of $86 billion, equating to more than 118 times BIDU’s expected revenues of $731 million. The shares are rich beyond even wildest dreams, selling at 91 times 08 estimates of $4.08 and 57 times 09 estimates of $6.54 (assuming 60% eps growth). Google (GOOG) is selling at only 23 times 09 earnings estimates. Now, I’m fully aware that the airlines aren’t generating a lot of earnings these days, and that BIDU is in a tremendous growth sector within an emerging market, however, I expect GOOG and YHOO to quickly start chipping away at BIDU’s market share as BIDU starts to deal with the law of larger numbers.
The shares present ample risk, as anything could happen, such as the Chinese government imposing undesirable regulations on BIDU or new technology emerging that render BIDU’s search technology less desirable. Since BIDU is a foreign company, they don’t have the same regulations as U.S. companies and, as a result, aren’t required to file 10Qs or 10Ks with the SEC. In addition to less stringent accounting standards, company insiders aren’t required to file a notice when they sell their shares, further clouding transparency. The shares are also trading at 40 times shareholders' equity, quite rich by most standards.
Traffic acquisition costs (commissions paid) for first quarter of this year versus the same quarter last year increased 30%, from 10.3% to 13.3% of sales. That’s a significant rise, as it could pressure margins in the future. Its online marketing customers rose a paltry 3.9% on a sequential basis, which is less than stellar for a high flying growth company.
Other red flags that pop up are a large short interest position of 5 million shares, or 15% of BIDU’s 35 million shares outstanding, which is ten times GOOG’s short percentage of only 1.5%. There must be a reason why this equity attracts so many bears.
Conventional wisdom clearly pushes the theory that “the trend is your friend”, and riding the momentum train is prudent, however this train could be heading for a certain derailment around the bend since the shares at these “lofty levels” appear to offer more risk than reward.
Disclosure: Author holds a short position in BIDU
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This article has 23 comments:
do no evil
Is someone who is long a stock unethical when they write a positive article?
This is not to say that I am long or short on this stock, only to remark on the lack of thought discipline on this. First, the competition in China from Google / Yahoo to Baidu has resulted in Baidu gaining close to 70% of search market, up from about 50% two years ago, when everyone expected Google was going to kill Baidu. Secondly, the market growth is nothing comparable to that of Airliners, both from an overall market perspective and from a Web Monetization perspective. Third, Baidu is not as simple a search engine than a widespread ranges of Web services, and as far as government is concerned, they have done an excellent job, 10 times better than Google.
The stock is not cheap, I don't bet either on it. But this kind of article is very misleading.
crosses the 5% ownership mark. A low sequential increase
in the number of customers isn't significant because Q1 is
cyclically a slow quarter, on par with the previous Q4.
TAC increase is the only negative in their report.
A companies fair value is both present value and forward looking.....I would see airlines as horrible investments as I think they will all go bankrupt with time if they continue to use jet fuel....and there isn't many alternatives right now. Biofuel with a 60-70% energy density of jet fuel most likely can't be used (maybe?). This is all coming from someone within the aerospace industry.
More and more people will spend time online....as they can't afford to drive around when fuel prices are $8-10-12/gallon in the near future. Baidu is a market leader......Google hasn't been able to take market share from them.....and Baidu plays on an uneven playing field....not held to US regulations....which I see as a HUGE advantage.
The shares are overpriced some....but nothing hugely out of the ordinary for the growth they are experiencing and will experience.
Just MO.
Thats why China controlled China netcom and Baidu juts joined forces.
Smaller Chinese compnaies like MYST.OB have also being given an enormous lift by their partnership with China Netcom
The Chinese government props up Baidu; the U.S. government props up Delta.
www.investorslive.com/.../