3 Reasons I'm Buying Shares of Baidu Inc.

Already five years into the latest bull run, investors can be forgiven for having a tough time finding great companies whose stocks are reasonably priced. But one of the biggest international technology companies out there, Baidu Inc. (NASDAQ: BIDU  ) , is ripe for the picking.

Shares of Baidu, China's largest Internet search engine, already account for roughly 12% of all of my stock holdings, but that's not going to stop me from buying more for my Roth IRA. Every month for the past three years, I've been telling fellow Fools what stock I'm purchasing for my Roth and why.

Over that time frame, this portfolio has returned 33%, which is outpacing the broader market by about 10 percentage points.

Read on to see why I think Baidu is such a good buy today.

  
China is still just beginning to come online
There are two megatrends that lead me to believe that the days of rapid revenue growth for Baidu are just getting started. First, China is home to the largest population of humans in the world. It just so happens that the behaviors of those humans are changing, and they're changing in a way that benefits Baidu.

The easiest way to see this is by simply looking at the rapid growth of the Chinese economy. While some may say that the days of a booming Chinese economy are coming to a close, its worth pointing out that even if China's GDP growth is cut in half, it's still far greater than most of the world's "mature" economies.

Source: World Bank, International Monetary Fund, Interfax, tradingeconomics.com, Internetworldstats.com, Reuters, Financial Times.

Furthermore, Internet penetration in China is still relatively low. And given the country's sky-high population, there are literally hundreds of millions of Internet users still about to come online in China over the coming decade.

Again, next to mature economies, there's simply no comparison. In fact, simply telling you what the penetration rates are isn't enough. You have to see the following graphic to get an idea for what I'm talking about.

Source: Internetlivestats.com

As far as Baidu is concerned, the more the economy grows, the more companies will be spending on Internet advertising -- which is where Baidu gets the bulk of its revenue. And as more and more Internet users come online, there's even more incentive for businesses to use Baidu to advertise.

A safe moat
Of course, when a market has this type of opportunity, there's bound to be some competition. In some respects, Baidu dodged a bullet when Google (NASDAQ: GOOGL  ) decided to effectively leave the country because of its prohibitive stance on individual freedoms, privacy, and liberty.

Globally, Google has about an 80% share of the search market. But within China, Baidu is easily the top dog.

Source: Techniasia.com

Qihoo 360 (NYSE: QIHU  ) has been a pesky thorn in Baidu's side, and if the trends from 2013 continue, it'll be worth re-evaluating just how much of a moat Baidu really has.

But there's one huge difference between the two companies: Qihoo has about $1 billion in cash, and $600 million in debt. Baidu, on the other hand, has over $6 billion in cash, and under $3 billion in debt. The big takeaway is that Baidu has six times the resources to outspend Qihoo right now.

Baidu already started flexing those muscles last year, when it announced the acquisition of leading mobile apps company 91 Wireless. But it hasn't stopped there. In fact, even though revenues are expected to grow by 47% in 2014, earnings are only expected to pop 9%.

Usually, that's bad news, but not here. Baidu is spending money to reinvest in its business and build an even wider moat around its search engine -- especially in the mobile realm. Over time, I believe that will help keep Qihoo at bay.

A compelling price
So what would you pay for a company that is: headquartered in the world's largest country which growing its economy at a very brisk clip; with hundreds of millions of Internet users about to come on-line; and revenue growing at almost 50%?

I would think anything below a P/E or P/FCF of 40 would be a pretty solid bet (I don't mind paying up for quality companies with great opportunities). But one look at today's price, and you see that Baidu is very reasonably priced, especially when compared with its much larger peer, Google.

 Company

P/E

P/FCF

Google

31

36

Baidu

31

31

Sources: SEC filings, Yahoo! Finance.

For all of these reasons, I'll be adding even more shares of Baidu to my family's holdings. Though all investors have their own unique considerations, I think it's worth figuring out whether Baidu belongs in your portfolio as well.

There's still time to get in on this other global technology play
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Read/Post Comments (7) | Recommend This Article (13)

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.

  • Report this Comment On March 24, 2014, at 12:03 AM, GaryDMN wrote:

    Google doesn't have an 80% share globally. That is not counting China, which has more internet users than the others combined (see the graph above) and just imagine when there are a greater number of internet users, on pace with the western countries.

  • Report this Comment On March 24, 2014, at 12:21 AM, predfern wrote:

    The demographic cliff will wipe China out. They will never recover from the one child policy.

  • Report this Comment On March 24, 2014, at 12:39 PM, pib56 wrote:

    BIDU's eps for fy 2013,14,15 are appx. $30, 32, 45. It's price is appx 150. How does this translate to a PE of 31 in your post? To me it appears to be <5.

  • Report this Comment On March 24, 2014, at 6:15 PM, nonbiasfool wrote:

    The $30, 32, 45 are in Yuan. 0.16 dollar = 1 Yuan

  • Report this Comment On March 24, 2014, at 10:11 PM, TMFCheesehead wrote:

    @pib56-

    Those are in Chinese Yuan. They need to be changed into US Dollars.

    Brian Stoffel

  • Report this Comment On March 24, 2014, at 10:25 PM, Mykiemon wrote:

    How did you come up with the DGP growth rates for the USA and China for 2014? I've not seen these high estimates before. Any reference?

  • Report this Comment On March 25, 2014, at 9:09 AM, TMFCheesehead wrote:

    @mykiemon-

    My apologies. In looking back at my notes, these estimates for US and China were over a two-year time frame (2014 and 2015).

    The basic thesis of China having growth that dwarfs other economies still stand, but this is an important error that I appreciate you asking about and pointing out.

    Brian Stoffel

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