In my opinion, Baidu (BIDU) is a company which has achieved excellent financial results and its current valuation is attractive. If you believe that the overall conditions in financial markets will be favorable, it's worth thinking about a purchase of Baidu's shares.
In the last few months, stocks of BIDU have not performed well, especially if we compare the performance of Baidu stocks to similar companies listed in NASDAQ. The table presents the performance of internet search engine companies: Google (GOOG), Qihoo 360 Technology (QIHU) - which is Baidu's competitor on the Chinese market, and the Russian search engine Yandex (YNDX).
The table presents the performance of internet search engine companies:
Baidu has reported excellent financial results for the last several quarters. The company has 85.64% annual EPS growth for the past 5 years and 77.87% annual growth of sales for the same period. Financial results for the second quarter also beat Wall Street's expectations (expectations were: earnings of $1.12 per share on revenues of $850.78 million, results were: earnings of $1.24 per share, on revenues of $858.80 million. In the second quarter of 2011 the company reported earnings of $0.72 per share on revenues of $528.36 million). The valuation of the company is attractive especially when we compare it to similar companies:
So the question is - why has Baidu performed poorly? In my opinion there are two reasons for such a situation: worries about a slowdown in the Chinese economy and the emergence of new competitors (namely: Qihoo). The latest data from China show that the slowdown of the Chinese economy is a fact (PMI below 50, 7.6% GDP growth in the second quarter of 2012 - the slowest in the last three years), but one can look at this situation in a different way: Baidu managed to achieve excellent financial results despite an economic slowdown. This is clear proof that the market in which the company operates is rapidly growing and that the Baidu business model works well.
As far as the emergence of Qihoo is concerned, the way in which many investors perceive the danger is, in my opinion, an example of market overreaction. It is natural that such an interesting, growing market attracts competitors. Baidu for years competed successfully with Google in the Chinese market. Although Qihoo achieved success (its browser's penetration rate is over 60% of all web users in China) this doesn't mean that it will manage to gain a big market share in web search quickly and easily because the Baidu brand is well-known in China. It's convenient to use Qihoo's own search engine while using Qihoo's browser, but it's also possible to set the Baidu search engine as the default on Qihoo's homepage. At the end of the day, the most important thing will be the quality of the search engine, and Baidu has proven its excellence. The most important battle in the future will take place in mobile search and Baidu is ready to compete in this market. The company has released a popular mobile web browser.
Instead of worrying about competitors and the economic situation it's better to look at the real numbers - the financial results of Baidu, which so far are excellent. Forecasts for the next few quarters are also very optimistic.
In summary, I think that investing in Baidu is worth consideration. The financial results of the company are impressive and valuation is attractive. The major short term risk factors are overall market conditions. In the long term, competitors such as Qihoo may be another risk factor, but in my opinion, if the market grows quickly, both companies may be successful. It means that the valuation of both Baidu and Qihoo may be higher.