Please ensure Javascript is enabled for purposes of website accessibility

Baidu Inc. (ADR): Eight Men Out

By Rick Munarriz - May 13, 2015 at 3:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

China's leading search engine cracks down on illegal corporate activity.

Source: Baidu. 

It isn't easy to be a corporate executive in China, particularly if you don't always play by the country's stringent rules. Reuters reported this week that Baidu (BIDU -1.61%) has fired eight executives who are accused of criminal behavior.

The actual misdeeds aren't spelled out in the internal memo that a Baidu spokesman confirmed as authentic to Reuters. However, it does point out that those let go include senior executives in the sales and marketing department, and that authorities have detained five of the suspects.

This should not panic Baidu investors. This is an unfortunate but common event at Chinese Internet companies. China has made cracking down on corporate corruption a priority in recent years, and Baidu has become a regular target. It had to dismiss employees, including some directors, in 2012, 2013, and 2014. 

There's always the fear that corruption -- especially in this instance since it is taking place within the sales and marketing department -- could mean that Baidu's numbers were inflated by selling ads to fraudulent advertisers, particularly in the medical field where bogus providers run wild. Baidu has been down this road -- at least twice -- and it didn't have to issue any financial restatements.

The market gets this. The stock inched less than 0.5% lower on Tuesday following the news, essentially taking the development in stride.  

It could be that investors know Baidu has a history of bouncing back from these setbacks. The stock is nearly a 20-bagger since bottoming out in late 2008 after the initial scathing expose on fraudulent medical advertisers on its site took its toll. Another thing helping Baidu coast through the eight dismissals this week is that the company is too strong a growth story to be tripped up by a few employees coloring outside of the lines.

Revenue popped by  34% year over year in Baidu's latest quarter, growing substantially faster than the other publicly traded international search engine regional leaders. Baidu's margins have been tested lately as it makes a bigger play for mobile, video, and travel businesses, but the stock is fetching a reasonable 20 times next year's projected profitability. Baidu's growth has been decelerating lately, but its market premium hasn't been this narrow.

Baidu is also brimming with cash. It had the equivalent of nearly $9.4 billion in cash as of the end of March. This doesn't suggest it has enough money to buy its way out of employee malfeasance, but it does indicate Baidu has the means to continue internal policing to ensure it stays on top of any possible corruption at the corporate level. Ousting executives for straying from China's restrictive rules is never fun, but for Baidu it's a common sport that hasn't been detrimental -- much less fatal -- in the past.


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Baidu, Inc. Stock Quote
Baidu, Inc.
$151.32 (-1.61%) $-2.47

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.