When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Baidu
With a market capitalization near $38 billion, Baidu is a rather large company, even though you may not have heard of it. Its size is larger than priceline.com's $31 billion, for example, and not too far from eBay's $51 billion. Many think of Baidu as China's version of Google, running the nation's top search engine.
Buy
If you like growth, look no further. Baidu's five-year average annual growth rate for revenue and earnings is 70% and 80%, respectively. And it has been trending upward a bit as well, with both topping 90% over the past year.
Let's back up a bit, though, to see where that growth is coming from. The company is a giant in online search in China, but it's not stopping there. It's expanding into other countries and languages and is moving into hardware as well, such as through a partnership with Dell to offer smartphones.
Baidu's growth potential is another attraction. Recently, only about 40% of China's massive population had Internet access. That should only rise over time, and even small increases will mean many millions of new Baidu users. Also, as my colleague Brian Stoffel recently noted, "last quarter each individual advertiser on the company's platform contributed 49% more revenue than last year."
Another factor in favor of Baidu is the strength of the Chinese yuan currency, which can make its profits more valuable relative to the U.S. dollar.
Many on Wall Street are bullish as well, with Standard & Poor's Equity Research recently rating Baidu a strong buy and projecting that over the coming year, its fair value should be close to $180 per share, some 60% higher than where it is now.
In a moment, I'll note some folks' objections to Baidu's valuation. But the opinion isn't unanimous. Others would point out that the company's P/E ratio has recently been less than half of its five-year average, and that its price relative to its book value, sales, and cash flow is also lower than usual. Per Yahoo! Finance's calculations, the stock's P/E-to-growth (PEG) ratio is a tantalizing 0.59, looking out over the coming five years. (It's not the most perfect indicator, but when determining it to get a rough suggestion of valuation, anything below 1.0 is promising.)
Sell
One of the biggest knocks against Baidu has long been its valuation. My colleague Sean Williams, for example, said back in November that he would bet against Baidu. The stock has since fallen, though, from around $140 per share to closer to $110. Still, its P/E ratio tops 30 and its forward P/E tops 17, while its price-to-sales ratio tops 14. Clearly, there are plenty of stocks that seem much cheaper.
Slowing economic growth in China is another concern, as it's likely to put pressure on Baidu's own growth rates. Still, even a slower rate will likely be faster than growth rates in more mature economies such as the United States. China's government is another worry, as it's fast to censor Internet content, which can stifle growth.
Some worry, too, that while Baidu enjoys a market share near 80% for consumers using computers, more and more people are starting to do much of their searching on smartphone platforms, where Baidu's share has been close to 35% -- versus only about 10% for Google. All is not lost there, either, though. For example, Baidu has inked a deal to be present on Apple
Baidu isn't the only game in town, either. Sohu, for example, also competes in the Internet arena in China, though it has been struggling lately. Its profit margins and sales growth lag Baidu's.
Hold (off)
Given the reasons to buy or sell Baidu, it's not unreasonable to decide to just hold off for now. You might wait to see how much of the mobile search market it grabs, or how successfully it enters other countries. Perhaps you'll just wait for a lower price, to offer more of a margin of safety.
You might want to look at other China-based companies as well. If so, consider Internet-portal company SINA
The verdict
I think Baidu looks rather attractive at the moment. It's not the only compelling stock out there, but it seems well worth considering. Still, everyone's investment calculations are different -- do your own digging and see what you think.
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