Baidu, Inc.'s (BIDU) shares now trade just slightly above their 52-week low. Like many China-based companies, the shares have been hit by a weak Chinese stock market, slowing economic data, as well as concerns that a competing search engine by QIHOO 360 Technology Co. Ltd. (QIHU), could impact revenues and growth rates for the company. However, after carefully evaluating these factors individually, it is easy to make a strong case for the idea that the sell-off is overdone.
The decline in the Chinese stock market is a direct result of weak economic data that has been coming from that country. Many believe that China is either heading for or is already in the midst of a "hard-landing". Recent economic data supports that idea for some, as the China manufacturing PMI shows that the economic contraction continued in September, with the index down to 47.8. However, this might just bolster China to get more aggressive with pro-growth stimulus policies in the near future.
Furthermore, it's important to put what is considered to be a slowdown in China, into perspective. That's because although the country might have had double-digit growth in the past, it now is only expected to grow about 7% annually. That is the kind of growth that most countries would dream to have, and it means that any slowdown is only likely to be temporary in nature. China has a massive population, and many of its people are becoming consumers of online goods and services. That is a secular trend that is not likely to be disrupted in the long term, and that is why this could be the best buying opportunity this stock has seen in years.
As far as concerns of a competing search engine by Qihoo go, one analyst at Riedel Research thinks it is overblown hype, and he eventually sees Baidu shares reaching $250, due to the historical valuations it has achieved in the past. Baidu is clearly the dominant search engine in China, and old habits die hard, so it seems unlikely for another search engine to unseat Baidu.
In the United States, a number of search engine companies have competed for market share, but Google (GOOG) has done well in spite well-financed competition from Microsoft's (MSFT), "Bing", Yahoo (YHOO), and others. This shows that there is room for some competition for Baidu, while leaving plenty of upside for it as the dominant player.
When Chinese stocks return to favor someday, (and chances are it will happen sooner or later), Baidu is likely to lead the rebound. Baidu trades for just about 15 times earnings estimates for 2013, versus about 25 times for Qihoo. That appears to be cheap for a company that could be poised to grow over 20% per year for the foreseeable future.
While the analyst target of $250 per share seems lofty, the stock could get there in the next couple of years, as earnings grow and if the price to earnings multiple expands. That's why it makes sense to consider buying Baidu, especially on dips.
Key Data Points For Baidu:
- Current Share Price: $111.27
- 52-Week Range: $99.71 to $154.15
- Dividend: none
- 2012 Earnings Estimate: $4.68 per share
- 2013 Earnings Estimate: $6.30 per share
- P/E Ratio: about 23 times earnings, or just around 15 times 2013 estimates
Key Data Points For QIHOO 360 Technology:
- Current Share Price: $24.75
- 52-Week Range: $13.71 to $26.35
- Dividend: none
- 2012 Earnings Estimate: 71 cents per share
- 2013 Earnings Estimate: $1.09 per share
- P/E Ratio: about 35 times earnings
Key Data Points For Google:
- Current Share Price: $728.12
- 52-Week Range: $480.60 to $728.56
- Dividend: none
- 2012 Earnings Estimate: $42.54 per share
- 2013 Earnings Estimate: $49.42 per share
- P/E Ratio: about 17 times earnings
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.