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Is Baidu, Inc. a Buy?

By Rick Munarriz - Feb 22, 2018 at 4:35PM

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China's online search leader is moving higher again after its strongest quarterly report in years and a pair of analyst upgrades.

China's leading search engine is back on the growth train. Baidu (BIDU 2.58%) shares have risen nearly 10% since the company reported better-than-expected financial results last week, closing on the all-time highs it hit in October of last year. 

Baidu has been one of the tech's biggest winners since going public 13 years ago at a split-adjusted price of $2.70. Its stock is a 90-bagger since then, but can it keep trouncing the market in the future? Let's dive into where the dot-com darling is now, where it's going, and if there are still gains to be had for new investors. 

Screenshot of Baidu's homepage.

Image source: Baidu.

Buy dude

Last week's quarter was a winner. Revenue rose 29% to hit $3.62 billion, ahead of the $3.34 billion to $3.52 billion it was targeting when it initiated guidance for the fourth quarter in late October. It's true that this isn't the same kind of scintillating top-line burst that Baidu routinely cranked out during its early years, but you still have to go back to 2015 to find the last time that it was growing faster than it just did during the final three months of 2017.

Things only get better at the other end of the income statement where adjusted earnings more than doubled to $2.29 a share. Baidu's operating profit also more than doubled. The improvement on the bottom line is largely the handiwork of Baidu unloading unprofitable businesses that aren't aligned with its core search and mobile businesses or its well-financed push into artificial intelligence. Cutting loose its food delivery and mobile gaming units last year and filing to take its popular yet margin-pinching iQiyi streaming video platform public will help put the focus back into the business. The divestitures in 2017 actually make the 29% pop in revenue for its latest quarter even more impressive. 

Looking out to 2018, Baidu sees revenue of $3.05 billion to $3.22 billion, rising 25% to 32% on a reported basis but up an encouraging 29% to 36% on an organic basis if we back out the businesses it sold off in 2017. Baidu doesn't provide earnings guidance, but analysts see a profit of $9.34 a share, pricing the stock at 27 times this year's projected bottom-line results. It's a rich multiple, but Baidu has historically traded at much higher P/E ratios and gone on to deliver monster gains. 

At least two analysts -- Daiwa and Morgan Stanley -- upgraded the stock following last week's report. Wall Street has pared back its bottom-line expectations for 2018 after learning that Baidu will be forming a $1.5 billion fund to advance the tech science of self-driving cars, but Wall Street pros are generally excited about Baidu despite any potential margin hiccups.  

The bottom line

Baidu is volatile, so it goes without saying that it's not a good fit for risk-averse investors. Even for folks willing to take on the risk of buying into a Chinese internet stock, it's a safe assumption that it's not going to be a 90-bagger through the next 13 years. You still have to like Baidu's chances. There will be its ups and downs. Baidu has had its swoons when Chinese stocks fall out of favor or when the country's regulators tighten or threaten to tighten online access. Baidu itself has also had its self-inflicted stumbles, including two years ago when it had to scale back on lucrative medical-related sponsored listings when a prolific blogger passed away after seeking treatment at an iffy cancer treatment center he found through Baidu.

The important thing to keep in mind is that Baidu has always bounced back. It continues to dominate in search and now more importantly mobile search. It also has more than $15.4 billion in cash and marketable securities on its balance, freeing it to make big bets like it's doing right now on AI in general and autonomous driving in particular. It's a winner until proven mortal over the long haul. Baidu remains a buy. 

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