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The Baidu Growth Story Continues

|Includes: AABA, BABA, Baidu, Inc. (BIDU), GOOG

Baidu's growth story isn't over yet

While we've been tracking the phenomenal growth of Baidu (NASDAQ:BIDU) since 2006, the recent Q3 and the economic outlook for China indicate that the growth for Baidu is far from over. In early 2009, long before the stock split and was trading at $100 (split adjusted: $10), our proprietary future comparative market cap evaluation model indicated a potential stock price of $1,000. Needless to say that nobody took us serious and as usual the naysayer published their many reasons why Baidu was overvalued. But so far, since then the performance of the stock price reached an equivalent of around $2,410. In early May 2014, our evaluation model indicated again a clear re-entry level at $150 with a mid-term target of $300 and a longer term price target of around $500 with yet again a long-term price target (by approx. 2020) of $1,000 which would still value Baidu way below Google's current market cap.

Baidu is directly connected to the immense China growth story

China remains a tremendous growth opportunity even if in between exuberant growth may slow down to more "normal" levels at times. We need to remember that just like stock prices, exuberant growth is never a straight line up. Nearly one billion people are still not integrated in China's new economy. That number alone is a reality check for China's immense economic expansion over the next couple of decades. And it's not just potential growth but instead it's a guaranteed scenario. When we look at the big picture of the China growth story then we see that a solid foundation has been laid to have a very effective integration process of nearly a billion consumers for decades to come.

The reasons why Baidu is still undervalued

The recent IPO of Alibaba (NYSE:BABA) made Baidu's stock connected to the performance of Alibaba shares. And that's actually good, because we think that Alibaba (BABA) too will continue to expand their businesses in the coming years. At around $84 B market cap, Baidu is inexpensive when compared to e.g. Google (GOOG, GOOGL) which is trading at a market cap of $380 B. Alibaba's market cap is now around $248 B and the struggling and tattered Yahoo (YHOO) market cap is registering at $45 B. We all know that Google will continue to grow, but Baidu's growth potential in percentage terms is far greater than the expected Google expansion. And China is not a market that is available to Google, but remains a solid monopoly for Baidu. With this fact there's yet another positive angle to the Baidu story. Should the government of China allow Google to enter the Chinese market some day, then this will be only possible via Baidu. This is due to the part ownership of the Chinese government in Baidu. Meaning, if down the road Google comes to a deal with the Chinese government, then most likely they not only will have to cooperate with Baidu, but instead acquire Baidu. A takeover/merger valuation of Baidu would be no less than $250 B offering a solid triple in the current stock price.

Going by the numbers and final thoughts

As always when making investment/trading decisions, emotions need to be eliminated as only the numbers and analysis matter. Even though revenue was nominally below estimates for Baidu in Q3/2014 it is not an issue in the overall picture of the phenomenal growth story of Baidu and China. We don't think that Baidu will fall asleep at the switch but will continue to innovate, expand and engage in cooperation with other Chinese and International companies. Considering everything, the growth story and potential for Baidu stock continues to be exceptionally strong.

Disclosure: At the time of first publication (Oct. 31, 2014) of this article, the author did not have a position in any security mentioned, but may enter a position in the future. This article is only a reflection of personal thoughts and is not a solicitation or recommendation to purchase, sell, trade or invest in any security mentioned.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: The article is solely a reflection of personal opinion and is not a solicitation to buy, sell, trade, invest, etc. in any securities mentioned in this article.