A Huge Potential Risk for Baidu Investors

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2013 has been an incredible year for growth stocks. However, even in a year in which the Nasdaq index surged an impressive 35%, shares of Chinese search powerhouse Baidu (NASDAQ: BIDU  ) have bounced even more. As we move toward the conclusion of another big year for the market, Baidu has more than doubled the market's performance.

BIDU Chart

BIDU data by YCharts

However, despite all the holiday cheer surrounding Baidu, there's also been one looming issue surrounding Baidu that should have investors shaking in their boots.

Bad for Baidu
Recently, Baidu and other publicly traded Chinese companies like it have been garnering a lot of attention as a result of a special legal structure they use and the potential legal implications this structure carries with it. Known as "Variable Interest Entities," or VIEs for short, this legal structure enables Chinese companies to legally circumvent Chinese government regulations that limited foreign ownership stakes in key industries or companies. This structure makes it possible for a company like Baidu to be publicly traded in the United States.

However, the Chinese Supreme Court recently ruled against the legality of the VIE structure of two publicly traded Chinese companies, raising the question of whether such an established name like Baidu could suffer a similar fate. In the video below, tech and telecom analyst Andrew Tonner discusses the story and what Baidu investors need to understand about this emerging storyline. 

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  • Report this Comment On December 24, 2013, at 11:01 AM, highgrowthcarson wrote:

    I'm sorry Andrew but I have to say this is irresponsible journalism. Yes you qualify and explain at the end that the outcome you fear is unlikely. But the article sensationalizes a possibility that has maybe .00001% chance of happening. It is an attention grabber with no content.

    Let me put it this way. If China shot down a few planes over their 'no fly zone' the world would be in a tiz. If China invaded Taiwan war might happen or cooler heads might prevail. But if China declared foreign investment in Baidu worthless, that would be an act of war and missiles would fly. No way. No how it ever happens.

  • Report this Comment On December 26, 2013, at 10:05 AM, aig09 wrote:

    Such a crappy worthless article. Why raise it as an issue to perturb the stock since it's unlikely and uneventful? People like you just like to confuse investors unnecessarily.

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