Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Dueling Fools: Baidu Bear

I'll admit, this duel is tough for me. As a colleague of Rick's on the Rule Breakers team, I'm hesitant to take shots at a member of our portfolio, especially once that's up more than 49% since the November issue. (Nasdaq: BIDU  ) is a great growth story. China's economy is expanding roughly four times as fast as our own. And now there's news that 137 million people were online in the Sino superpower in 2006 -- up 23% from the year before. How do you argue with that?

Dodging the question ... for now
It's a good question, which I'll get back to.

First, let me say that while I won't tell you that Baidu is by-the-numbers overpriced -- I'm not a by-the-numbers value investor -- I strongly believe in relative valuation as described by New York University professor and Investment Fables author Aswath Damodaran. And that's where Baidu goes bad.

To recap, Damodaran argues that industry comparisons are worthless if you're comparing firms of different sizes and growth rates. That's what we have with Baidu and, say, Microsoft (Nasdaq: MSFT  ) . Comparing the two is irrelevant.

Take a moment to sun yourself
So, what's fair? I ran a screen at Capital IQ for firms valued at more than $4 billion, that traded on a U.S. exchange, and which, like Baidu, had at least doubled revenues over the past year. As expected, several not-so-cheap stocks turned up, including Sirius Satellite Radio (Nasdaq: SIRI  ) and Amylin Pharmaceuticals (Nasdaq: AMLN  ) .

But it was Rule Breakers portfolio teammate Suntech Power (NYSE: STP  ) -- a $5.4 billion company that's profitable, growing fast, and positioned at ground zero in the explosive solar-power industry -- that turned out to be the best comparison for Baidu.

Yet its stock is a lot cheaper:




EV to Revenue



Normalized P/E



Price-to-Book Value



Source: Capital IQ, a division of Standard & Poor's.

As are the stocks of Baidu's own industry rivals, Google (Nasdaq: GOOG  ) , Yahoo! (Nasdaq: YHOO  ) , and Microsoft:





EV to Revenue




Normalized P/E




Price-to-Book Value




Source: Capital IQ.

The George McFly of tech stocks
Alert Fools will notice that the problem with my argument is that it's inherently hypocritical. I've recommended expensive stocks before. Anyone else remember Akamai Technologies?

Here's the difference. When I picked Akamai, it was underpriced versus tech titans like Microsoft -- yet it too was dominant in its market, with patent protection.

Baidu, on the other hand, is widely understood and has no unassailable advantages. Search is too immature a technology. Programmers across the globe are working on ways to make the technology more intuitive. And private equity firms are pouring millions (maybe billions) into the effort. Every one of these projects is a threat to Baidu.

But investors know this. That's why even the suggestion of weakness has sent the stock running for cover faster than George McFly in Back to the Future. Check out this chart to see the stock's schizophrenia live and in color.

Don't let your portfolio get kung-powed
Back to the question at the open. How can you argue against a company that, for the moment, so thoroughly dominates its niche in a massively growing market? It takes guts. Which, interestingly, is also what the captain of our pirate ship, David Gardner, said when Rick picked Baidu.

Why? Because even David knew that there's a huge risk in holding the stock. He just happens to believe the risk is worth it.

David and Rick may end up being right. They have been thus far. But with technology moving as fast as it does, it's only a matter of time before a better search engine arrives. How long after you invest in Baidu will that be?

You're not quite done yet! To see the bull argument and the rebuttals, click here. If you've already read everything, cast your vote for the winner here.

Baidu is a recommendation of the Motley Fool Rule Breakers growth investing service. Ask for us a free all-access pass to get a closer look at all six stocks that have more than doubled since this market-beating portfolio began two years ago. Your pass is good for 30 days, and there's no obligation to subscribe.

Fool contributor Tim Beyers, ranked 762 out of more than 20,700 in Motley Fool CAPS, own shares of Akamai. Get the skinny on everything Tim is invested in by checking his Fool profile. You needn't search for disclosure at The Motley Fool.

Read/Post Comments (0) | Recommend This Article (15)

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.

Compare Brokers

Fool Disclosure

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: 520601, ~/Articles/ArticleHandler.aspx, 10/24/2016 6:19:44 PM

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...

Today's Market

updated Moments ago Sponsored by:
DOW 18,223.03 77.32 0.43%
S&P 500 2,151.33 10.17 0.47%
NASD 5,309.83 52.43 1.00%

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

10/24/2016 4:00 PM
BIDU $180.86 Up +4.10 +2.32%
Baidu CAPS Rating: *****
AMLN.DL $0.00 Down +0.00 +0.00%
Amylin Pharmaceuti… CAPS Rating: **
GOOGL $835.74 Up +11.68 +1.42%
Alphabet (A shares… CAPS Rating: *****
MSFT $61.00 Up +1.34 +2.25%
Microsoft CAPS Rating: ****
SIRI $4.18 Up +0.03 +0.72%
Sirius XM Radio CAPS Rating: **
STPFQ $0.00 Down +0.00 +0.00%
Suntech Power Hold… CAPS Rating: *
YHOO $42.59 Up +0.42 +1.00%
Yahoo CAPS Rating: **