Investing in winning stocks is equal parts art and science. Making the endeavor harder is that finding stocks primed for a move higher often involves seeing something the rest of the market is missing.
Here at The Motley Fool, we don't believe in market timing. We prefer investing for the long term. When I went looking for a stock poised to pop in 2017, Chinese tech giant Baidu (NASDAQ:BIDU) stood out for a number of reasons. Baidu's stock price has struggled to keep pace with its product and financial evolution -- partially for some fair reasons -- making its shares an interesting idea today.
Baidu's stock price struggles
The past half-decade has been a rather unremarkable time to own Baidu stock, which I hold in my brokerage account.
The company has dramatically underperformed its benchmark index, the Nasdaq Composite, over the past five years. Worse yet, Baidu stock has effectively traded sideways over the past three years. So what caused investors to shun Baidu shares?
After riding the rise of the Chinese internet to incredible success, Baidu has invested heavily to establish dominant positions across the myriad opportunities present today as the Chinese tech industry continues to mature and evolve. A nice corollary is Google's metamorphosis into the more diversified holding company Alphabet. Baidu has spent heavily to drive this transition, which has placed near-term pressures on the company's bottom-line profitability.
Expanding sales and marketing its teams have been the main drivers in Baidu's recent surge in costs. Over its past three full fiscal years, Baidu's selling and marketing expenses grew from 16% of revenue in fiscal 2013 to 25.7% in 2015, while every other major cost category for the company remained mostly stable as a percentage of sales. The important distinction is that growing a sales and marketing organization will eventually allow Baidu to monetize its new services, but this process takes time. Meanwhile, Baidu has launched a series of new products that should bolster its competitive presence in the Chinese tech market for years to come.
What the market is missing
As the market has ignored Baidu stock, the company itself has launched a steady stream of new products that investors should be cheering. Notable new products include the iQiyi video streaming platform, Baidu Takeout Delivery online food ordering and delivery service, Baidu Maps, Baidu Wallet, and many more. Like Baidu's search engine, most of the company's transaction services borrow their business models from already-successful Western tech products and services. iQiyi is a YouTube copycat that already enjoys a staggering 520 million monthly users and growing. Providing these services to China's massive population base should yield plenty of revenue in the years to come. Baidu CEO Robin Li once estimated that transaction services enjoys a $400 billion opportunity.
Beyond near-term services, Baidu has also pushed into next-gen technologies such as deep learning, artificial intelligence, and self-driving. The company's voice-responsive personal assistant, Duer, has garnered high praise from the tech community, earning the title of one of MIT Technology Review's top innovations of 2016. In addition, Baidu has hired an impressive array of academic talent, including Stanford-trained Andrew Ng, to lead its Baidu Research operations. Finally, the company has been one of the most active developers of autonomous-vehicle technology, which it hopes to deploy commercially as soon as 2018.These moves should all allow Baidu to maintain its leadership position in China as each technology plays an increasingly prominent role in the coming years.
Putting it all together
The market's fixation on the negative near-term effects of Baidu's investment spending makes sense to a point. Analysts see the company's current-year earnings declining year over year before returning to its above-average growth rate next year. However, this strikes me as the investing equivalent of missing the forest for the trees.
Baidu is clearly pursuing a sensible long-term strategy that should end with it controlling a far larger share of China's digital economy. At some point, the market will awaken to this reality. Especially if the forward guidance Baidu issues in its quarterly reports signals a recovery is coming, Baidu's stock could begin to rise this year.
With Baidu trading at some fairly compressed earnings multiples, a signal that the company is returning to above average growth could set the stage for a dramatic rally. Investors with the foresight to invest before the market comes to its senses should stand to do quite well, which is precisely why I think 2017 could be Baidu stock's best year yet.