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4 Reasons Baidu Is Bottoming Out

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The number of investors looking to profit from Baidu (NASDAQ: BIDU  ) downticks is intensifying.

When Nasdaq's bimonthly update showed that 10.6 million shares of Baidu were being sold short as of mid-February -- a 52-week high in terms of pessimism -- I was skeptical. "Given the growing record number of speculators betting against Baidu, it also wouldn't be a surprise to see the stock rally as the result of a short squeeze the next time that the fallen dot-com darling has something good to say," I concluded.

Well, Baidu hasn't had anything material to say. The stock is trading a sneeze away from a fresh two-year low. Meanwhile, the worrywarts are piling up. Nasdaq's latest short tallies are out, and Baidu closed out February with nearly 11.6 million shares sold short, a million more shorted shares than it had just two weeks earlier.

Clearly, the market isn't too happy with Baidu as an investment these days, but let me go out on a limb and suggest a few reasons Baidu may be bottoming out right now.

1. Baidu has never been cheaper
You have to go back to the summer of 2010 to find the last time China's leading search engine was trading below the mid-$80s. Baidu earned $3.02 a year later, so its forward earnings multiple -- using yesterday's close of $87.65 to make this an even comparison -- would've clocked in at a seemingly rich 29. However, that proved to be a bargain. The stock nearly doubled a year later.

Baidu keeps growing. It earned $4.79 a share last year. Analysts see a profit of $5.40 a share this year and $6.77 come 2014. Baidu's forward earnings multiple today is actually less than 13.

One can argue that Baidu's growth has decelerated, and that's fair. However, it's growing a lot faster than most of the other proven growth stocks with similar multiples.

2. The Qihoo 360 threat is overrated
Baidu's shares have been weak since Qihoo 360 (NYSE: QIHU  ) introduced its own search engine this past summer.

Qihoo 360 is best known for its Web browser and suite of security software. It decided to boot Google (NASDAQ: GOOGL  ) as its default search engine, rolling out a homegrown platform that quickly ballooned to between 10% and 15% of China's search market.

Baidu continues to command roughly two-thirds of China's search market, serving up 5 billion search queries a day. This battle isn't any more intense than what we see between Google and Bing in this country, but investors are still nervous.

I'm not dismissive of Qihoo 360. I've even suggested that investors buy both companies. However, Qihoo 360's presence in search hasn't warranted the sharp sell-off at Baidu.

Yes, Baidu put out a poorly received quarterly report in its first complete quarter, competing against Qihoo 360. But revenue still climbed a healthy 42%, and Baidu's guidance for the current quarter calls for 38% to 43% in year-over-year revenue growth.

Oh, and a Beijing court is paying attention to Baidu's claims that Qihoo 360's foray into search consists of crawling and copying Baidu's content.

3. Baidu is even cheaper than Google now
Google is a great company, but it's growing at a much slower clip than Baidu. Back out its revenue-padding Motorola Mobility acquisition, and Google revenue grew at half of Baidu's rate.

However, Google is trading at more than 15 times next year's projected earnings. Is Google worth that kind of premium? Absolutely. However, Baidu should be commanding an even healthier multiple.

The only other major pure play in search -- Russia's Yandex (NASDAQ: YNDX  ) -- is also growing slower than Baidu, and it's fetching 18 times next year's bottom-line forecast. Yes, Yandex is another great online investment. It should beat the market from here. However, Baidu has some serious ground to make up on both of these companies -- and it will.

4. China is still growing faster than the balance of the world
You want exposure to China. It's easy to hear about KFCs in China that post negative comps or Chinese companies that warn of sequential revenue declines for the current quarter, but this is still an economy growing at roughly 8% annual clip.

It's worth noting that the sequential dip -- a decline that will include Baidu -- is a seasonal factor that's made worse by the late start of the Chinese New Year this time around. China's economy is already growing at two to three times the rest of the developed world, and it's still early in the online migration cycle.

Baidu also has some growth initiatives brewing outside China, for those who don't want to put all their eggs in one restrictive government's basket, but China itself is a market that's dying for a bounce.

Good luck with that Baidu short. You're going to need it.

Back to Baidu
Regardless of your short-term view on the Chinese economy, there may be opportunity in Baidu (a.k.a. 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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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 March 18, 2013, at 3:37 PM, kashif777 wrote:

    Is someone deflating the stock in order to buy it out? Google, e.g.?

    Can't understand or believe the drop, given the positive financials. Seems rigged, i.e. can't win without insider knowledge...

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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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