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China's Economic Slowdown Shouldn't Stop You From Buying Baidu's Stock

By Brian Stoffel - Apr 16, 2013 at 11:15AM

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There exists a huge gap between China's GDP and the potential for this company.

If you're in the unhealthy habit of checking your portfolio every 20 minutes, yesterday was a bad day. On news that the Chinese economy grew by 7.7% during the first three months of 2013, stocks traded down by over 2%.

That type of GDP growth is much higher than the growth most developed nations experienced, but significantly below the 8% figure analysts were expecting. Investors are worried because demand from China has been a key factor in the global economic recovery since 2009.

That being said, the sky isn't falling. Amid this fear, there's one Chinese stock I think is still a great buy. Read below to find out why, and at the end, I'll offer up access to a special premium report on the company: China's largest search engine, Baidu (BIDU -6.67%).

Let's compare to a contemporary
Many people refer to Baidu as the "Google (GOOGL -4.95%) of China," and rightfully so; Baidu has an 80% market share of search in the world's most populous nation.

One look at what Google has been able to accomplish over the last five years should offer some perspective on the opportunity Baidu has... even if China's growth slows.

US GDP Chart

U.S. GDP data by YCharts.

Granted, the United States only makes up about half of Google's revenue . But that 10% growth equates to just about 2% annual GDP growth per year. China's economy is growing almost four times faster.

But during this time frame, Google's revenue grew by 20.7% and earnings by 16.2% per year. That's a huge disconnect between GDP growth in the States.

How important is the macro picture?
Make no mistake about it; the macro environment does have an effect on how a company performs. But the degree of this effect is vastly different depending on the industry you are talking about.

If we were comparing railroads, there would be a significant correlation between GDP and revenue/earnings growth. If fewer products are being made and consumed, then there's going to be less stuff sent over the railroads.

That's simply not the case, however, when it comes to the Internet and search engines. Remember, Google still makes the lion's share of its money from advertising. As more and more people used Google to make Internet searches over the last five years -- especially from mobile devices using the Android platform -- more and more companies were willing to pay Google to deliver personalized advertisements.

It simply makes sense for companies to do this -- it is cost-effective and usually hits a target market better than any other advertising tool.

And as time goes on, Google collects more information on every user, making its ads even more relevant -- whether we're in a recession or not.

What it means for Baidu
Back to China: Though Baidu and Google certainly aren't the same company, Google has laid out a blueprint for success that Baidu can easily use to produce similar results.

While it might seem odd for Americans to imagine, the Internet itself is still a relatively new concept for Chinese citizens.

Source: World Bank. 

Nearly eight in 10 Americans use the Internet regularly, but less than half that percentage uses the Internet regularly in China.

And think about how inexperienced China's Internet users are. When America passed the 10% penetration threshold 17 years ago, Google hadn't even been founded yet. China, on the other hand, only passed that mark in 2006. Most Chinese Internet users have only been online for less than five years.

As they become more experienced -- which they likely will, regardless of the macroeconomic climate -- ads delivered by Baidu will be more valuable to Chinese businesses. In fact, Baidu recently said that it had about 600,000 business customers using its services for advertising. While that might seem large, the company sees the potential market of 10 million advertising customers. That means the customer list could increase tenfold and the company would still only have a 60% market share!

Why pass at this price?
Even if I've underestimated the effects the China slowdown could have on the company, and overestimated the market potential, today's price has a worst-case scenario baked in. In fact, Baidu is now cheaper than its ever been.

BIDU P/E Ratio TTM Chart

BIDU P/E Ratio TTM data by YCharts.

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