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3 Reasons to Buy Baidu Under $100

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Baidu (NASDAQ: BIDU  ) is back in double digits, but it may not last long.

Baidu closed below $100 for the first time since late last year on Tuesday, after posting poorly received quarterly results. Squeezed margins and guidance calling for a sequential top-line decline in the current quarter will do that to a stock.

Baidu isn't perfect, obviously. However, the stock may prove to be too big of a bargain for growth investors to pass up at this point. Let's go over a few reasons why Baidu is probably cheaper than you think.

1. Baidu is still growing
Yes, growth has decelerated at China's leading search engine. The years where revenue was roughly doubling a year are gone forever. There's still growth to be had here. Don't be fooled by the sequential weakness.

In the fourth quarter -- the first time that Qihoo 360's (UNKNOWN: QIHU.DL  ) rival search engine was available for the entire period -- revenue still climbed 42%, for Baidu's first $1 billion quarter.

Baidu's guidance for the current quarter may represent a 4% to 7% sequential decline, but there are seasonal factors at play here. (NASDAQ: SOHU  ) actually braced investors to expect a 12% to 17% sequential decline in revenue at its Sogou search engine this quarter.

The end result is still impressive on a year-over-year basis. Generating $945.4 million to $975.9 million in revenue this quarter would represent 38% to 43% in growth.

That's not too shabby.

2. Baidu is cheaper than you think on an earnings basis
Broadening its video platform, and exploring new growth opportunities, means straying from the chunky margins of paid search. It also requires investments in the near term that will hopefully pay off in the long run.

It's not fun to see a company grow its revenue by 42% in its latest quarter, only to see grabbing hands milk the income statement to the point where operating income only inched higher by 24%.

Analysts are left with little choice but to scale back their profit targets. Three months ago, analysts figured that Baidu would earn $6.03 a share this year, and $7.56 a share come 2014. Now, the pros are perched at an average of $5.61 a share this year, and $7 a share next year. It's often dangerous to buy into companies at a time when estimates are trending lower, but Baidu's growing too quickly to dismiss at less than 18 times this year's projected earnings, and just 14 times next year's bottom-line forecast.

3. Baidu may be the best bet in search
Something interesting happened this month, as Google (NASDAQ: GOOGL  ) raced to new all-time highs last week, and Baidu fell after Monday night's report. Both stocks now command a forward earnings multiple of 14. Google's ratio is actually slightly higher if we begin digging to the right of the decimal.

Is Google better than Baidu? As a company, of course Google is better. Big G is the global leader in search. However, in terms of valuation, it should be Baidu that receives the premium. Baidu is expected to grow its revenue next year at double Google's growth rate. The battle for earnings growth is closer, given Baidu's margin contraction; but Baidu still wins there, with a 25% expected growth spurt versus Google at 17.

This doesn't mean that Google isn't a great investment. Big G is going to be a winner, even at today's new highs. However, Baidu is growing considerably faster.

Yandex (NASDAQ: YNDX  ) is the third largest publicly-traded search company. Yandex is growing quickly as the top dog in Russia and other Eastern European countries. However, its forward earnings multiple is in the high teens, even though it's growing at a comparable rate to Baidu.

Yes, Yandex is another great growth stock that will serve investors well. The point here is simply that Baidu is the better value of the three companies.

Putting it all together
It's easy to lose one's enthusiasm for Baidu. Investors take on substantial risks in buying into faraway China, and the world's most populous nation has a history of controlling personal freedoms that include online usage.

However, Baidu has come too far, and China knows that it stands to lose credibility as a global business partner if it should ever tighten the clamps on the information superhighway.

Baidu isn't perfect. It's just cheap.

Betting big on Baidu
Regardless of your short-term view on the Chinese economy, there may be opportunity in Baidu (aka the "Chinese Google"). Our brand new premium report breaks down the dominant Chinese search provider's strengths and weaknesses. Just click here to access it now.

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