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2 Reasons Baidu Stock Just Popped 12%

By Rich Smith - Jan 8, 2021 at 1:10PM

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The "Chinese Google" will build an electric car. Its internet business doesn't look too shabby, either.

What happened

Shares of Baidu ( BIDU -0.67% ), known as the "Google of China," were up 12% at 11:50 a.m. EST on Friday, for two good reasons.

First, Reuters yesterday confirmed the rumors that Baidu is pairing up with local Chinese automaker Geely to produce smart electric vehicles (EVs), joining the Chinese EV gold rush.  

And second, Japan's Mizuho Bank just raised its price target on buy-rated Baidu to $250 a share.

Xray style view of an electric car plugged into a charger

Image source: Getty Images.

So what

These two news items do not appear to be related. As reported this morning, Mizuho is basing its enthusiasm about Baidu stock on a belief that the company is making progress in both the e-commerce and advertising markets in China and the U.S.

The Reuters article is all about the EV project, which is far more than a simple partnership. Baidu is reported to be taking a majority stake and absolute voting power in the new joint venture with Geely, which will provide factories and engineering know-how. Baidu will provide the brains of the cars produced: the high-margin software that makes the cars go zoom.

Now what

Baidu is clearly the senior partner in this relationship. It's also a company with the financial heft to make its mark in EVs. From a surface perspective, Baidu's profits fell sharply last year, to just $295 million in net income. But a closer review of the company's financials with help from S&P Global Market Intelligence data reveals that Baidu's generation of positive free cash flow was not nearly as bad as the decline in GAAP profitability might suggest.

Free cash flow (FCF) in 2019 was a strong $3.2 billion, and despite a slow start because of the pandemic, FCF in 2020 looks to be similar. Through the first three quarters of 2020, the company has reported $2.3 billion in positive free cash flow, and if you project that out through the year's final quarter, Baidu looks to be on track for about $3.1 billion in 2020.

With plenty of cash coming in and a wide-open market, now looks like a great time for Baidu to charge into the EV market.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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