October got off to a rough start for Baidu (BIDU 1.06%) investors. Shares of China's leading search engine took a 10% hit last week, hitting new 52-week lows on Friday. The stock has now plummeted 28% since hitting all-time highs in May.
The past few months have been brutal for investors in Chinese growth stocks, and Baidu shareholders are feeling the pain. The stock is now a few ticks away from buckling below $200 for the first time since July of last year, but this is the wrong time to be pessimistic about the former dot-com darling's prospects. Let's go over some of the reasons why Baidu is poised to bounce back.
Image source: Baidu.
1. The stock hasn't been this cheap in a long time
Arguing that Baidu is attractive fresh off a 14-month low would ring hollow if profits were going the wrong way, and thankfully that's not the case here. Baidu's adjusted earnings soared 45% in its latest quarter. Rising income and a cascading share price combine for dinner bell in two-part harmony.
Baidu is now trading for less than 20 times this year's projected earnings, and that's something we haven't seen in years. The online behemoth is also fetching a mere 17 times next year's profit target, and we're not even backing out the $19.4 billion in cash, equivalents, and short-term investments on its balance sheet. Growth may be slowing at Baidu, but it's moving at a headier pace than its earnings multiple.
2. Earnings surprises should continue
Stocks typically hit new lows when they're not living up to Wall Street expectations, but that's not the case here. Baidu has done nothing but consistently land above analyst profit projections. It hasn't even been close over the past year.
| Quarter | EPS Estimate | EPS Actual | Surprise |
|---|---|---|---|
| Q3 2017 | $1.96 | $3.72 | 92% |
| Q4 2017 | $1.93 | $2.16 | 12% |
| Q1 2018 | $1.53 | $1.89 | 24% |
| Q2 2018 | $2.41 | $3.06 | 27% |
Data Source: Yahoo! Finance.
Baidu has managed to blast through analyst forecasts with double-digit percentage beats every single quarter over the past year. Wall Street has been slow to catch on to the bottom-line turnaround story here. Operating margin keeps improving as Baidu shifts its focus back on its bread-and-butter high-margin search business. Momentum is on Baidu's side on that front, and if the beats continue, it means that Baidu is trading for a lot less than 20 times this year's earnings.
3. China won't be out of favor forever
Investors have been steering clear of Chinese equities since trade war shots were exchanged, but Baidu seems one of the better-positioned companies ahead of any fiscal fisticuffs. Its business consists primarily of matching Chinese advertisers with Chinese internet users, not the importing or exporting of physical goods internationally.
Baidu isn't entirely immune to the trade war tension, and it bears pointing out that it has a campus in Silicon Valley where it's working on self-driving cars and other wide-reaching tech applications. The trade tariff situation will inevitably ease, making this a great time to stock up on Baidu. You can tell your friends that you picked it up at 19.8 times this year's earnings, though in retrospect it will probably be even cheaper than that.
