Is Baidu a Buy After Earnings?

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

Baidu (NASDAQ: BIDU  ) released its fourth-quarter earnings results on Wednesday. Top-line growth was fantastic. Revenue at the Chinese search leader climbed 50% to $1.573 billion, beating analysts' estimates. Bottom-line growth, however, was nonexistent.

After net income climbed just 0.6% in 2013, Baidu doesn't expect profit growth to rise very much in 2014, either. Morgan Stanley downgraded the stock from "buy" to "hold" due to the forecasted earnings weakness, but following the so-called smart money here might be a mistake. Baidu shares are priced very well compared to comparable companies Qihoo 360 (NYSE: QIHU  ) , Yandex (NASDAQ: YNDX  ) , and Google (NASDAQ: GOOGL  ) .

Why earnings is the wrong growth metric
Baidu grew its earnings more than 77.7% per year from 2008 through 2012. Growth was driven by the growth in China's Internet and marketing industry.

China's Internet population has more than doubled since 2008, but a lot of that growth has come from mobile users. In 2008, less than 40% of Chinese Internet users were on mobile devices. In 2013, that number climbed to 81%. In the meantime, desktop and laptop users fell 0.8% and 1.8% in 2013, respectively.

As the Chinese population connects to the Internet via mobile devices, Baidu must work harder and spend more to attract these users since it doesn't dominate mobile search like it does on the desktop. Its desktop search business is still strong, and it's making inroads with investments in mobile, among other areas. As the company establishes its footing in other areas like mobile and video, profits will return to growth.

With that in mind, a more accurate picture may be drawn from the company's continued strength in revenue growth. Revenue grew 62.5% annually from 2008 through 2012, and it grew another 43% in 2013. For the first quarter of 2014, the company expects an acceleration in revenue to 55% to 60% growth.

Comparing price to sales growth


Price-to-Sales Ratio (TTM)

Expected Revenue Growth 2014




Qihoo 360









*based on revenue from Q4 2012 to Q3 2013
Source: Yahoo! Finance

After earnings, revenue estimates may be revised up for Baidu, since its first-quarter guidance topped analyst forecasts. Nonetheless, Baidu is currently offering better value for sales growth than any of the above-mentioned companies except Yandex.

Yandex operates in the rapidly expanding Russian Internet market, where it controls 62% of the country's search market. It grew revenue 37% in the fourth quarter, well behind Baidu's 50% growth. Still, the company is making progress in improving its product and presence outside of its home country by making deals with rivals Google and Facebook. Although its revenue isn't growing as quickly as Baidu's, it's trading at a relatively inexpensive price.

A better comparison may be to Google circa January 2008 -- the last time its price-to-sales ratio was as high as Baidu's is now. The company grew revenue 31% over the next 12 months. Back then, shares weren't quite as inexpensive as Baidu's are now, considering future revenue growth. But an investment in Google at the beginning of 2008 would have paid off quite handsomely. Google's share price increased nearly 86% since then.

Qihoo 360 represents Baidu's biggest threat, particularly in mobile. The company launched its search engine just two summers ago, and has quickly climbed to become the country's No. 2 search provider after Baidu. Through the strength of its security software, browser, and mobile assistant, Qihoo has won over nearly one-quarter of Chinese web searchers. Baidu's share, meanwhile, has fallen to about two-thirds. It should be no surprise that a lot of Qihoo's search traffic is coming via mobile.

Despite the market share gains, Qihoo didn't see much search revenue in 2013. Morgan Stanley estimates the company generated just $28 million in search ad revenue in the third quarter. But the newly hired John Liu, a former Google China exec, was brought on to help improve monetization. Still, valued at 23.56 times sales, it's a lot more pricey than Baidu.

No profit growth, no problem
Baidu's management is taking a long-term approach. It spent the last year snatching up key companies to better establish itself as a giant in the Chinese Internet ecosystem. Most notably, the company purchased the 91 Wireless app store -- the biggest in the country -- for $1.9 billion. It's expanding aggressively in mobile, video, and other endeavors, and will continue investing in 2014. Its strong revenue-growth expectations is a great sign for investors, who shouldn't worry about profits in the short-term.

An Internet revolution is upon us -- are you set to profit?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980's, before the consumer computing boom. Or purchasing stock in e-commerce pioneer in late 1990's, when they were nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play", and then watch as it grows in EXPLOSIVE lock-step with it's industry. Our expert team of equity analysts has identified 1 stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

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

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.

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: 2858897, ~/Articles/ArticleHandler.aspx, 9/1/2015 12:08:47 AM

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...

Adam Levy

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinal mania

Today's Market

updated 2 hours ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

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

8/31/2015 3:59 PM
BIDU $147.25 Down -4.88 -3.21%
Baidu CAPS Rating: ****
GOOGL $647.82 Down -11.87 -1.80%
Google (A shares) CAPS Rating: ****
QIHU $52.87 Up +0.21 +0.40%
Qihoo 360 Technolo… CAPS Rating: **
YNDX $12.20 Down -0.15 -1.21%
Yandex CAPS Rating: ****