Baidu Is Just Getting Started

One of the more interesting presentations during this week's Web 2.0 Summit in California came from a rare U.S. appearance by Baidu (Nasdaq: BIDU  ) CEO Robin Li.

Baidu has no intention of entering our market anytime soon. It has no interest in taking on Google (Nasdaq: GOOG  ) and Microsoft's (Nasdaq: MSFT  ) Bing in alphabet-based language search. Its strength lies entirely in character-driven search, where it commands roughly two-thirds of all searches in China. It entered Japan in 2008, and is eyeing other Asian markets, but that's pretty much it for now.

Li even began by pointing out that this was his first time on stage for an interview in a stateside industry conference. He's a rock star back home, complete with a traveling fan club, but he's relatively unknown here.

So what exactly is Li doing here?

Well, it doesn't hurt that Baidu's $38 billion market cap makes it as big as eBay (Nasdaq: EBAY  ) . Stateside investors are clearly interested in Baidu as an investment, even if they may never unearth the need to use the portal itself.

Li is here to explain why his company's stock may not be as overvalued as pundits think.

Forever climbing the great wall of valuation worry
Baidu isn't cheap, but plenty of naysayers have skewered its valuation at much lower price points, only to wind up eating crow.

Baidu's heady growth and chunky margins make it a compelling speedster today, but it's really far away from its ultimate finish line.

Less than a third of China is currently online, and Li estimates that Baidu reaches 99% of those who are. Work the simple division on China's 1.3 billion residents, and you'll find that Baidu already reaches more people in China than the entire U.S. population.

Obviously, there are compelling reasons why Google -- with a thinner share of the stateside market than Baidu's mastery of China -- commands a market cap five times greater than Baidu's. Big G is a global player; Baidu is still playing regional ball. Advertisers also spend far more on marketing through Google, reaching out to consumers who -- for now -- have far more to spend. It's a wide gap, though China's economy is huffing and puffing at a brisk pace to make up the difference.

Waiting is not the hardest part
How long will it take for China's Internet penetration rate to approach that of established markets? We may not be as far away as you think.

Some bears misperceive China as a country of bike-pedaling farmers in rural areas with no inherent need for connectivity. Reality is far more refreshing. As Li points out, there are roughly 800 million mobile phone users in China -- or double the number of folks online.

For those scoring at home, China Mobile (NYSE: CHL  ) commands a larger market cap than Google, and even more than domestic wireless leaders AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) . Can you fathom half of this country's mobile phone owners not having Web access?

However, most of these handsets are rudimentary 2G devices that do little more than make calls and exchange text messages. It will take some time before China's citizenry can embrace full-fledged smartphones and consistent connectivity.

It will happen, though. Short of China taking a step toward more restrictive access -- something that can obviously happen, but remains highly unlikely now that all eyes are on the world's most populous nation -- China will catch up.

Baidu, naturally, will catch up, too.

It's just getting started, regardless of what today's valuation metrics may indicate.  

Do you think Baidu is a good buy at this point? Share your thoughts in the comments box below.

Google and Microsoft are Motley Fool Inside Value picks. Baidu and Google are Motley Fool Rule Breakers recommendations. eBay is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a bull call spread position on eBay. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of China Mobile, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has only been to China once, but he relishes admiring its dot-com revolution from afar. He does not own shares in any of the stocks in this article. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 16, 2010, at 10:03 PM, greaterajax wrote:

    If you believe China is immune to inflation-fueled boom and bust cycles, and that 10% growth will simply continue until every Chinaman is a middle-class citizen with a house, a car, and a big TV, then BIDU is a great buy.

    I think the bust is coming for China, and everything Chinese is going to suffer. Stocks like BIDU with astronomical valuations more than most. Considering a short position.

  • Report this Comment On November 17, 2010, at 4:56 AM, wwt17 wrote:

    greaterajax,

    i have to agree wholeheartedly with the author and i wouldn't short bidu even with your money. in the big picture of china, it's a fledgling company in a fledgling economy. it operates under the graces of the chinese government as well. sure the business cycle will go on in china with peaks, troughs, bubbles and busts, but over the long term, bidu has a good chance of continued leadership in its market.

  • Report this Comment On November 17, 2010, at 10:19 AM, wyrdmage wrote:

    Baidu may or may not continue its run (I think it will for awhile), but to ignore Chinese companies because of troughs & peaks is the same as saying "Don't invest in U.S. stocks because we can't continue without another bust". On the macro scale, American companies are currently the greatest place to invest, even with ups & downs. Unless we get our debt under 1 trillion dollars, China will be the top dog in the financial world. My bet is on China for the future, even with its ups & downs.

  • Report this Comment On November 17, 2010, at 3:00 PM, afamiii wrote:

    I would agree that their is still value in Baidu even at 115 PE.

    EPS growth 112% this qtr, 118% last qtr, 165% mar qtr.

    Quality of this earnings: i) 59%/75%/76% rev growth mar/last/this qtrs. ii) RoE 45%, RoA 36%.

    Sustainability of this earnings growth: i) less than 50% penetration into the addressable market, ii) ongoing move from print ads to online/search based ads in China and across the world.

    Valuation: Growth companies are very difficult to value (one of the reasons why they often end up overvalued.) i) PEG ratio (price to earnings growth) is about 1. Most investors would agree this is a fair valuation. ii) the Venture Capitalists approach (which is too difficult for the average manager) assume it is mature (with a PE of 18) in 5 years, given the likely market size by then (based on current growth and expected penetration,) and discounting at say 18% to 22%. Would make Baidu about $100.

    In short the big returns have been made, expect 20% going forward, as PE reduces but profit continues to grow.

    My personal experience is that if you want to make a killing, buy growth stocks with lots of lattitude to continue growing for another half decade or so at PEs below 50, or even below 40 if you can get them.

  • Report this Comment On November 19, 2010, at 8:51 PM, MinnesotaLAS wrote:

    2 years ago I foolishly bought some shares of a pricey Baidu on MF advice then 2 years later, mysteriously, I had 10 times the number of shares! I have sold 3/4 of it and used much to pay down the principal on our mortgage and help some favorite but hurting charities. With the value of our property decreasing, a 30 year mortgage and nearing retirement - it seems like a good use of the profit to me. I love this stock!

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