4 Reasons to Buy Baidu Today

This may not seem like the best time to begin dabbling in China's fallen dot-com darlings.

Chinese growth stocks are dropping like flies. There's a real investor confidence problem out there, compounded by six weeks of general market declines. However, this is also shaping up to be an ideal time to begin warming up to Baidu (Nasdaq: BIDU  ) .

Let's go over a few of the reasons to consider China's largest search engine at a time when investors aren't searching in China at all.

1. Baidu isn't broken.
Shares of Baidu have fallen 24% since peaking two months ago.

It's one of the lucky ones. Leading online portal SINA (Nasdaq: SINA  ) has shed 42% of its value, and that's with its red-hot Twitter-esque Weibo continuing to gain traction in the world's most populous nation. ChinaCache (Nasdaq: CCIH  ) was one of last year's hottest IPOs, but the Web services provider is now trading a whopping 80% off its earlier high.

Investors need to disconnect a stock's popularity with its fundamentals. Buying into Baidu may be out of favor, but analysts haven't been more encouraged about the company's prospects than they are right now.

Three months ago, Wall Street targeted a profit of $2.48 a share out of Baidu this year and $3.61 a share for next year. Now the pros see earnings of $2.64 a share this year and $3.97 a share come 2012.

2. The valuation is tempting.
You don't need to be a mathematical wunderkind to know that a falling share price coupled with improving profitability results in contracting P/E multiples.

With last night's close of $118.03 and the now beefier net income target of $3.97 a share for next year, Baidu's trading at a forward multiple of a mere 29.7.

When's the last time that you could've bought into Baidu at a year-ahead P/E of less than 30? It's still a high number, but Baidu is growing at a headier clip than that and will likely continue to do so for several more years.

Analysts see revenue climbing 67% this year and 51% next year, with Baidu's bottom line growing even faster.

Baidu's too cheap to ignore relative to its growth.

3. The comparisons get better.
Baidu has always been a speedster relative to Google (Nasdaq: GOOG  ) , but now we have another regional search engine to chew on. Russia's Yandex (Nasdaq: YNDX  ) went public at $25 last month and is still trading nicely above its initial price tag.

The same can't be said for Baidu over the past month, though investors will eventually realize that Baidu is growing faster and serves a much larger market. Baidu may already command a much larger market cap than Yandex, but comparing Baidu's growth over the next few quarters with that of Yandex and Google should be a rewarding practice from Baidu's perspective.

4. Catalysts are everywhere.
Even if Chinese stocks fail to claw their way back into investor fancy, there are plenty of Baidu-specific news items that may propel the stock higher.

Facebook CEO Mark Zuckerberg met with Baidu when he visited China several months ago, and reports began surfacing in April indicating that Facebook would be launching in China with Baidu as its partner. History has proven that outsiders flop in China without a homegrown partner, and Baidu's the perfect fit.

If you don't see the multiple-expanding potential of social networking, check out the lofty valuations for Latin America's Quepasa (NYSE: QPSA  ) and corporate specialist LinkedIn (NYSE: LNKD  ) .

Another potential springboard is overseas expansion. A Baidu executive told Bloomberg last month that the company is developing products in a dozen different foreign languages. Baidu entered Japan a few years ago -- with minimal success -- but investors have a way of falling for the tantalizing possibilities of global growth.

There's a world of opportunities -- and growth -- waiting for Baidu.

Is Baidu cheap right now, or is it still too rich for your blood? Share your thoughts in the comment box below.

The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Google, Sina, and Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz has only been to China once, but he relishes admiring its dot-com revolution from afar. He does not own shares in any of the stocks in this article. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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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 June 14, 2011, at 3:02 PM, boblone19 wrote:

    Yep you're right, between BIDU and SINA, bidu is much better, SINA ceo have clean up his share, he is going to separe WEIBO from SINA management.

  • Report this Comment On June 16, 2011, at 12:02 AM, JF125780 wrote:

    I have to agree with you, It's hard to find a better company than BIDU at 118.84.

    Dan Kowkabany

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