3 Reasons to Believe in Baidu Next Week

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

These are challenging times for Baidu (Nasdaq: BIDU  ) .

After seeing its stock peak at an all-time high last summer, shares of China's leading search engine are trading nearly a third lower today.

It's not as if Baidu has done anything wrong. The dot-com speedster has consistently delivered better-than-expected bottom-line results over the past year. The company is still growing faster than Internet companies that are a fraction of its size.

What gives?

Well, investors are worried about China. They see reports of slowing growth. They see published worrywarts taking shots at the accounting of lesser Chinese equities, and sometimes actually hitting their marks.

However, there are a few reasons to get excited about Baidu as we head into the company's next quarterly report on Monday. Let's dive in.

1. Baidu is trading at a steep discount to its growth
The market's been spoiled by Baidu's healthy growth in the past, and that's likely to continue in the near term.

Wall Street feels that Baidu's revenue grew 61% in its latest quarter to $850.8 million. They're holding out for a profit of $1.12 a share, 55% ahead of where it was a year earlier.

What kind of multiple would you expect with that kind of growth premium? Well, the market feels that Baidu is worth just 23 times this year's earnings and only 17 times next year's projected profitability. In other words, there's a lot of discounting going on.

2. A bad apple in China doesn't ruin the batch
If an international investor would tell you that he or she avoided buying U.S. companies after the Enron accounting fraud scandal you would probably shake your head. He or she missed out on some great performers over the past few years, merely under the flawed assumption that if one company's crooked, the whole country must be doing something fishy.

Chinese stocks generally take a hit when a company is accused of malfeasance. It doesn't matter that most of the jabs ultimately prove unwarranted. Investors play on the cockroach theory: If they find one, they assume that there are plenty more hiding around.

We saw this happen earlier this week when the SEC -- and then Muddy Waters -- took exception to the accounting at New Oriental Education (NYSE: EDU  ) . Several Chinese companies took a hit, including Baidu and online gaming giant NetEase (Nasdaq: NTES  ) .

Now, we do live in a small world. Baidu CEO Robin Li has been on New Oriental's board for six years. The head of its audit committee is NetEase's former CFO. So what? We do not know if the SEC investigation will turn up accounting irregularities, but even if there are problems it obviously doesn't implicate other companies.

Chinese companies prove their trustworthiness one quarter at a time. Baidu has never been accused of fudging its numbers, and its market leadership position has been verified many times over.

3. Baidu knows how to please the market
Companies usually beat Wall Street's profit targets. However, it's not easy to do so consistently. Baidu has posted better-than-expected results for 12 consecutive quarters. Don't bet against that streak going to 13 come Monday afternoon.

Winners continue to win. The past three years haven't been perfect. We've seen the global slowdown. We've seen decelerating growth in China. We saw Google (Nasdaq: GOOG  ) threaten to become a major force in China, but peaking a couple of years ago with less than half of Baidu's market share.

Add this up over time, and what this probably means is that Baidu is going to earn more than Wall Street thinks over the next few quarters, making the stock likely trading for far less than 17 times next year's earnings.

Everything is lining up just right for Baidu. Between the pessimism baked into the shares over the past year and its track record of landing ahead of the prognosticators, it should be a good week for Baidu.

Bullish on Baidu
A bullish call on Baidu has served me well on Motley Fool CAPS over the years. True to the CAPScall initiative, I'm not going to give up on it now. Baidu has soared 1,228% since I recommended it to Rule Breakers newsletter subscribers six years ago, but it's not the only way to cash in on heady growth overseas. A new report details the three U.S. companies set to dominate the world. It's totally free, but you don't want it to leave the country without you, so check it out now.

The Motley Fool owns shares of Google and Baidu. Motley Fool newsletter services have recommended buying shares of, Google, Baidu, and New Oriental Education & Technology. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (0) | Recommend This Article (6)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1950646, ~/Articles/ArticleHandler.aspx, 10/28/2016 2:36:31 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,155.95 -13.73 -0.08%
S&P 500 2,127.24 -5.80 -0.27%
NASD 5,190.62 -25.36 -0.49%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/28/2016 2:20 PM
BIDU $180.58 Up +5.48 +3.13%
Baidu CAPS Rating: *****
EDU $51.55 Down -0.58 -1.10%
New Oriental Educa… CAPS Rating: **
GOOGL $823.04 Up +5.69 +0.70%
Alphabet (A shares… CAPS Rating: *****
NTES $263.65 Down -3.40 -1.27%
NetEase CAPS Rating: ****