Intel And Baidu Partnership Is A Step In The Right Direction

| About: Baidu, Inc. (BIDU)

Intel (NASDAQ:INTC) announced last week that it was partnering with Chinese search engine Baidu (NASDAQ:BIDU) in a joint innovation lab. They plan to create software for the growing Chinese mobile Internet market. In this lab, Chinese developers will have access to PCs and mobile devices powered by Intel chips. Intel also hopes that these developers will create apps that will have voice-command and facial-recognition features. This joint venture was announced at the end of the Intel Developer Forum in Beijing.

Baidu is the number 1 Chinese-language search engine. Last year the company was ranked 5th overall in Alexa Internet rankings. Baidu provides advertisers with its Baidu Tuiguang, which is similar to Google's Adwords and Adsense. It utilizes the pay-per-click like Google. All of its web administrative tools are in Chinese.

Intel wants to strengthen its position in the Chinese market. Intel is aggressively making a push into the mobile market, and China is now the world's largest smartphone market. In China there's no better partner to have than China's version of Google (NASDAQ:GOOG), Baidu.

The partnership will focus on software and hardware integration. There are currently no plans for a joint smartphone. Baidu hopes to use the partnership to strengthen its efforts in cloud computing. Intel hopes to gain a larger presence in China and supply more companies with chips. A high-profile partnership with Baidu will help Intel build its brand in China.

Baidu wants to strengthen its mobile presence. In 2011, Baidu launched its Android-based mobile platform called Baidu Cloud. The platform has not done as well as expected with, only six different smartphones sold in China with Baidu Cloud pre-installed. Baidu hopes to strengthen its mobile presence with help from Intel.

A Look At Intel Shares

Intel investors have had a rough year with the stock down over 22%. Overall, PC sales have been weak, and that has been a drag on the sector. Weak PC sales equal weak demand for Intel's chips.

From a valuation standpoint, Intel is still a value play. The stock trades with a forward P/E of 10.51, and the PEG ratio is less than 1 at 0.93. Operating margins are still high at 27.44%. On the balance sheet, there's $18.20 billion in cash to $13.57 billion in debt. Book value per share is $10.36. Intel pays an annual dividend of 90 cents for a yield of 4.20%. The payout ratio is only 41%, so there's room to increase the dividend.

Of the analysts that follow the stock, 6 have it rated as a Strong Buy, 10 a Buy, 25 a Hold, 6 an Underperform, and 1 a Sell. Price targets for the stock range from $16 to $29 with $23 being the median target.

A Look At Baidu Shares

Baidu investors like Intel's have had a rough year. Baidu stock is down over 38% in the past year. Baidu's stock has gotten hit over fears of slowing growth in China and Baidu's inability to capitalize on mobile trends. Baidu has a market cap of $31.44 billion. The stock trades with a forward P/E of 13.26 and the PEG ratio is incredibly low at 0.54. Operating margins are an outstanding 49.54%. The company has $5.18 billion in cash and only $1.90 billion in debt. Book value per share is $11.88.

Of the analysts that follow the stock, 6 have it rated as a Strong Buy, 9 a Buy, 10 a Hold, 3 an Underperform, and 2 a Sell. Price targets for the stock range from $80 to $180 with $120 being the median target.

Outlook For Intel And Baidu

I think this partnership makes sense for both companies. Intel is partnering with a leading company in the fast-growing Chinese market. Baidu gains access to devices powered by Intel chips. Baidu needs to strengthen its mobile presence like Google did. The Chinese Internet market is extremely competitive, and Baidu's competitors have all turned their attention to the mobile market.

Both stocks look attractive as value plays, not growth stocks. To become growth stocks again, both need to make a bigger push into the mobile market. Intel needs to get its chips on mobile devices, and Baidu needs to strengthen its mobile marketshare in mapping and mobile search. Baidu is facing tough competition on both fronts.

Hopefully both companies can make their partnership work. A successful partnership would be good for both companies and for shareholders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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