These are challenging times for Baidu
After seeing its stock peak at an all-time high last summer, shares of China's leading search engine are trading nearly a third lower today.
It's not as if Baidu has done anything wrong. The dot-com speedster has consistently delivered better-than-expected bottom-line results over the past year. The company is still growing faster than Internet companies that are a fraction of its size.
Well, investors are worried about China. They see reports of slowing growth. They see published worrywarts taking shots at the accounting of lesser Chinese equities, and sometimes actually hitting their marks.
However, there are a few reasons to get excited about Baidu as we head into the company's next quarterly report on Monday. Let's dive in.
1. Baidu is trading at a steep discount to its growth
The market's been spoiled by Baidu's healthy growth in the past, and that's likely to continue in the near term.
Wall Street feels that Baidu's revenue grew 61% in its latest quarter to $850.8 million. They're holding out for a profit of $1.12 a share, 55% ahead of where it was a year earlier.
What kind of multiple would you expect with that kind of growth premium? Well, the market feels that Baidu is worth just 23 times this year's earnings and only 17 times next year's projected profitability. In other words, there's a lot of discounting going on.
2. A bad apple in China doesn't ruin the batch
If an international investor would tell you that he or she avoided buying U.S. companies after the Enron accounting fraud scandal you would probably shake your head. He or she missed out on some great performers over the past few years, merely under the flawed assumption that if one company's crooked, the whole country must be doing something fishy.
Chinese stocks generally take a hit when a company is accused of malfeasance. It doesn't matter that most of the jabs ultimately prove unwarranted. Investors play on the cockroach theory: If they find one, they assume that there are plenty more hiding around.
We saw this happen earlier this week when the SEC -- and then Muddy Waters -- took exception to the accounting at New Oriental Education
Now, we do live in a small world. Baidu CEO Robin Li has been on New Oriental's board for six years. The head of its audit committee is NetEase's former CFO. So what? We do not know if the SEC investigation will turn up accounting irregularities, but even if there are problems it obviously doesn't implicate other companies.
Chinese companies prove their trustworthiness one quarter at a time. Baidu has never been accused of fudging its numbers, and its market leadership position has been verified many times over.
3. Baidu knows how to please the market
Companies usually beat Wall Street's profit targets. However, it's not easy to do so consistently. Baidu has posted better-than-expected results for 12 consecutive quarters. Don't bet against that streak going to 13 come Monday afternoon.
Winners continue to win. The past three years haven't been perfect. We've seen the global slowdown. We've seen decelerating growth in China. We saw Google
Add this up over time, and what this probably means is that Baidu is going to earn more than Wall Street thinks over the next few quarters, making the stock likely trading for far less than 17 times next year's earnings.
Everything is lining up just right for Baidu. Between the pessimism baked into the shares over the past year and its track record of landing ahead of the prognosticators, it should be a good week for Baidu.
Bullish on Baidu
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The Motley Fool owns shares of Google and Baidu. Motley Fool newsletter services have recommended buying shares of NetEase.com, Google, Baidu, and New Oriental Education & Technology. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.