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Why Baidu Stock Popped 10% Today

By Rich Smith - Jan 12, 2021 at 3:16PM

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Wall Street is warming to Baidu -- and maybe not for the reason you think.

What happened

Shares of Chinese internet search giant Baidu ( BIDU -0.67% ) are on another tear Tuesday, rising another 10.6% through 2:25 p.m. EST. Partly, this appears to reflect investor optimism over Baidu's plans to enter the red-hot market for electric vehicles in China.

But it's also partly thanks to Wall Street and its analysts.

Origami dollar folded into an arrow pointing up

Image source: Getty Images.

So what

This morning, market researcher OTR Global announced it has upgraded shares of Baidu, reports It's not a huge upgrade, just from negative to mixed -- or, roughly speaking, from sell to hold. Still, the upgrade reflects a lessening of pessimism surrounding the stock. And curiously, it doesn't seem to have much to do with Baidu's plans to enter the car market.

Rather, reports TheFly, OTR is basing its upgrade on hopes that ad spending in China is picking up in Q1 2021 and on a belief that Baidu will grab share from its competitors in this rising market.

Now what

Is this reason enough to buy Baidu stock, though? I'm actually not certain it is. Consider: In 2019, before the coronavirus, Baidu generated $3.2 billion in positive free cash flow from its business. In 2020, already mostly recovered from the fallout of the virus, the company looks like it probably got back on track to get close to that number again. Although the year's final quarterly results aren't out yet, on a run-rate basis, I see Baidu generating perhaps $3.1 billion in cash this year.

Weighed against the company's $74.9 billion market capitalization, though, that still works out to a more than 24 times free cash flow valuation on the stock. Unless Baidu's venture into electric vehicles generates a whole lot more growth than the 18% or so annual growth Wall Street currently expects from it, Baidu stock still looks pricey to me.

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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