Baidu, Inc. (NASDAQ:BIDU) is facing uncertainty as the economic impact of the coronavirus remains unclear. Share values of BIDU have fallen in recent months since the outbreak began. The company relies on advertising for much of its revenue, but the ad sector is particularly vulnerable to economic slowdowns, and Baidu has had to battle with popular start-ups such as Bytedance (BDNCE). However, it is possible that the outbreak could actually help the company as more people are staying home which could lead to greater adoption of the company's services.
To aid in the fight against COVID-19, the company is increasing efforts in the artificial intelligence and healthcare technology sectors. It currently runs an online doctor consultation platform which the company has made free to use for any online medical queries. It is also providing its "LinerFold" algorithm that gene testing agencies, epidemic control centers, and research institutions globally can utilize for free to further vaccine development research. Further observation is needed to determine if these efforts provide favorable publicity for the company and will help share prices recover in the future.
While current news stories, good or bad can sway our opinion about investing in a company, we need to determine which news topics will have a long-term and ongoing effect on the company and its share price. It's also a good idea to analyze the fundamentals of the company to see where it's been in the past and in which direction it's heading.
This article will focus on the long-term fundamentals of the company, which tend to give us a better picture of the company as a viable investment. I also analyze the value of the company versus the price and help you to determine if BIDU is currently trading at a bargain price. I provide various situations which help estimate the company's future returns. In closing I will tell you my personal opinion about whether I'm interested in taking a position in this company and why.
Snapshot of the Company
A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer's company rating score. It shows a score of around 85/100. Therefore, Baidu, Inc. is considered to be a good company to invest in, since 70 is the lowest good company score. BIDU has high scores for 10 Year Price Per Share, ROE, Earnings per share, Ability to Recover from a Market Crash or Downturn, ROIC, and Gross Margin Percent. It has a low score for PEG Ratio. A low PEG Ratio score indicates that the company may not be experiencing high growth consistently over the past 5 years. In summary, these findings show us that BIDU seems to have above average fundamentals since the majority of categories produce good scores.
Before jumping to conclusions, we'll have to look closer into individual categories to see what's going on.
(Source: BTMA Stock Analyzer )
Fundamentals
Let's examine the price per share history first. In the chart below, we can see that price per share has fluctuated quite a bit over the last 10 years, with a sharp decline from 2018 to 2019. Overall, share price average has grown by about 2.44% over the past 10 years or a Compound Annual Growth Rate of 0.27%. This is an extremely low return and could be a red flag when considering this company.
(Source: BTMA Stock Analyzer - Price Per Share History)
Earnings
Looking closer at earnings history, we see that earnings have grown somewhat consistently over the past 10 years, with the exception of 2015.
Consistent earnings make it easier to accurately estimate the future growth and value of the company. So, in this regard, BIDU is a decent candidate of a stock to accurately estimate future growth or current value.
(Source: BTMA Stock Analyzer - EPS History)
Since earnings and price per share don't always give the whole picture, it's good to look at other factors like the gross margins, return on equity, and return on invested capital.
Return on Equity
The return on equity shows a spike in 2015, similar to the earnings history. Therefore, it's better to be more conservative and focus on the ROE values after 2015. In years 2016 - 2018, the average ROE is 16.74. For return on equity (ROE), I look for an average of 16% or more. So BIDU just meets my requirements.
(Source: BTMA Stock Analyzer - ROE History)
Let's compare the ROE of this company to its industry. The average ROE of 69 Information Services companies is 30.52%.
Therefore, Baidu, Inc.'s 5-year average of 26.00% and current ROE of 19.73% are below average.
Return on Invested Capital
The return on invested capital has been mostly increasing when disregarding 2015 as an outlier for special and one-time items that have affected ROIC. Five-year average ROIC is fine at around 17%. For return on invested capital (ROIC), I also look for a 5-year average of 16% or more. So BIDU just passes this test as well.
(Source: BTMA Stock Analyzer - Return on Invested Capital History)
Gross Margin Percent
The gross margin percent (GMP) has been decreasing over the last five years. Five-year GMP is good at around 54%. I typically look for companies with gross margin percent consistently above 30%. So BIDU has proven that it has the ability to maintain acceptable margins over a long period.
(Source: BTMA Stock Analyzer - Gross Margin Percent History)
Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity is less than 1. This is a good indicator, telling us that the company owns more than it owes.
BIDU's Current Ratio of 2.59 is good, indicating that it has a good ability to use its assets to pay its short-term debt. Ideally, we'd want to see a Current Ratio of more than 1, so BIDU exceeds this amount.
According to the balance sheet, the company seems to be in good financial health. In the long term, the company seems fine in regards to its debt-to-equity. In the short term, the company's financial situation soundly demonstrates it has the ability to repay short-term debt.
The Price-Earnings Ratio of 19.7 indicates that BIDU might be selling at a high price when comparing BIDU's P/E Ratio to a long-term market average P/E Ratio of 15. The 10-year and 5-year average P/E Ratio of BIDU has typically been between 32 and 24, so this indicates that BIDU could be currently trading at a low price when comparing to BIDU's average historical P/E Ratio range.
BIDU does not currently pay a regular dividend.
(Source: BTMA Stock Analyzer - Misc. Fundamentals)
Value Vs. Price
For valuation purposes, I will be using a diluted EPS TTM of 46.94. I've used various past averages of growth rates and P/E Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.
In the table below, you can see the different scenarios and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.
(Source: BTMA Wealth Builders Club )
According to this valuation analysis, BIDU is undervalued.
- If BIDU continues with a growth average similar to its past 10 years' earnings growth, then the stock is undervalued at this time.
- If BIDU continues with a growth average similar to its past 5 years' earnings growth, then the stock is undervalued at this time.
- If BIDU continues with a growth average similar to its past 10 years' book value growth, then the stock is undervalued at this time.
- If BIDU continues with a growth average similar to its past 5 years' book value growth, then the stock is undervalued at this time.
- If BIDU continues with a growth average similar to its past 5 years' total equity growth, then the stock is undervalued at this time.
- According to BIDU's typical P/E ratio in relation to the S&P 500's P/E Ratio, BIDU is undervalued.
- If BIDU continues with a growth average as forecasted by analysts, then the stock is overpriced.
This analysis shows an average valuation of around $153 per share versus its current price of about $121, this would indicate that Baidu Inc. is undervalued. But this valuation amount is far from reliable because of two main reasons.
The past growth of the company has been immense, which doesn't directly translate into the same kind of future growth, since the company is showing strong signs that growth has been slowing. This slowed growth is very evident when you compare the 10 year EPS growth (33%) by the much smaller 5 year EPS growth (15%).
Secondly, future forecasts are all over the board. But mostly the analysts are forecasting much lower growth and sometimes growth of -66% to -84%. These predicted growth rates are unreliable, but they are at least a warning that we could expect much lower future growth and that the valuation of the company cannot be based off of the astronomical growth of the past.
Forward-Looking Conclusion
According to the facts, Baidu is financially healthy in a long-term sense in having enough equity as compared with debt, and in the short term because the current ratio indicates that it has enough cash to cover current liabilities.
Other fundamentals are solid, including ROE, ROIC, and EPS.
Lastly, this analysis shows that the stock is undervalued, but also unreliable.
Future Potential Growth
To get an idea of future potential growth, let's first look at actual 10 and 5 year return results of Baidu.
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10 Year Return Results if Invested in BIDU:
Initial Investment Date: 3/2/2010
End Date: 3/2/2020
Cost per Share: $51.89
End Date Price: $120.77
Total Return: 132.74%
Compound Annualized Growth Rate: 9%
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5 Year Return Results if Invested in BIDU:
Initial Investment Date: 3/2/2015
End Date: 3/2/2020
Cost per Share: $205.04
End Date Price: $120.77
Total Return: -41.08%
Compound Annualized Growth Rate: -10%
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From these scenarios, we have produced results from -10% to 9%. It's not exactly a predictable company for returns. From these numbers it seems more like a stock that could make or break you.
The chart below will provide a visual perspective of how Baidu stock performed against the S&P 500 from 2007 to 2020.
It's obvious that Baidu experienced a huge amount of growth overall vs. the S&P 500. But also Baidu is much more volatile. During the 2008 recession, Baidu fell much more than the general market. Then in years following the company experienced highs and lows like a roller coaster running on rocket fuel!
For me, the choice is certain. I would take an objective look at this company and realize that Baidu, Inc. is a company with good overall fundamentals, but it is extremely unpredictable. Analysts are all-over the board trying to guess what will happen next for this stock and shareholders could be in the ride of their life (up or down) while holding this exciting investment that isn't for the faint-hearted. Hopeful shareholders of Baidu better be ready for super high highs and heart-stopping drops. While I do see some great value potential in this company, I'm in search of more consistent and predictable companies. Therefore, I'll let this roller coaster pass on by.
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