If you're a buyer of Baidu (BIDU -1.99%) over the past year, it's a safe bet that your investment is currently underwater. Shares of China's leading search engine are hitting fresh 52-week lows this month, and the stock is trading below $200 for the first time since early last summer.
There are a lot of things weighing on Baidu these days, and some of the knocks have merit. The fundamentals have started to show signs of decay. And it's been generally a rough climate for investors in Chinese growth stocks as trade tensions with the U.S. grow, China's economy slows, and regulatory agencies in the world's most populous nation become more particular and vigilant. Baidu is cheaper than it's been in more than 15 months, but one can also argue that there are good reasons for the markdown.
Image source: Baidu.
Fearing the worst
Trying to time one's purchase of falling Chinese growth stocks isn't for the timid. It's been like catching a falling knife in recent months, and Baidu stock has shed nearly a third of its value since its springtime peak. It's not the only thing that has gone down since then.
China's yuan has been depreciating versus the dollar since April. This may not seem to be a big deal for a company that makes most of its revenue within China, but it is a big deal for stateside investors when the value of revenue, earnings, and ultimately the share price suffer on a translated basis.
We've also seen analysts scale back their expectations. The same Wall Street pros who just three months ago were forecasting a Baidu per-share profit of $10.36 this year and $12.68 come 2019 are now modeling $10.03 for 2018 and $11.42 for next year. In short, it's not just the P in the P/E ratio that's been moving lower.
Hoping for the best
Bulls will argue that the stock has fallen a lot harder than the fundamentals. We haven't been able to buy Baidu at a forward earnings multiple in the teens in years. Wall Street isn't jazzed about owning Baidu right now, but these analysts have underestimated the dot-com giant's eventual profit in each of the past four quarters.
| 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.
There is a gray cloud when it comes to investing in China. Trade sanctions are escalating on both sides, and the one red-hot Chinese economy has cooled. Chinese regulators have also clamped down on everything from online games to video content to once-lucrative health product ads as sponsored search-engine listings. It's not a perfect scenario, but Baidu is too cheap to ignore at this point. It has fallen out of favor before, and it has always found a way to bounce back into fancy.
