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A Billion Reasons to Buy Baidu

By Rick Munarriz - Jul 30, 2015 at 8:02PM

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China's leading search engine has been marked down in recent months, making it a better, though riskier, purchase.

Source: Baidu. 

The market was selling shares of Baidu ( BIDU 7.47% ) on Tuesday, leading the top Chinese search engine to announce its intentions to be a buyer on Thursday.

Baidu announced that it would be buying back $1 billion worth of its stock in the coming year. It's good for the money. Its balance sheet was flush with a record $12.1 billion in cash and equivalents by the end of June. 

Even with market-pleasing acquisitions that have pushed it into new realms of online travel and smartphone app marketplaces, Baidu continues to pad its vault with money. It may as well put a chunk of that to good use by eating its own cooking at a rare moment when its stock is out of favor. 

The stock has fallen 25% so far in 2015 through Wednesday's close, fueled mostly by a 15% hit on Tuesday after announcing unsavory quarterly results. It was certainly an unpleasant report, particularly on the bottom line where earnings fell short of Wall Street estimates and contracting margins find analysts slashing their profit targets for the balance of the year.

Baidu's ability to squeeze as much of its revenue as possible down the income statement has been poor in recent quarters, but that is largely the result of expanding into mobile and other online niches where monetization has been challenging for more than just Baidu.

This doesn't mean that all should be forgiven. It's frustrating to buy into a scalable dot-com model, only to see new factors like mobile migration eat into the once promised margin expansion. This has been going on at Baidu for nearly three years. You have to go all the way back to the third quarter of 2012 -- according to S&P Capital IQ data -- to find the last time year-over-year earnings growth outpaced year-over-year revenue growth. 

Things should change over time. Just as we're starting to see some stateside dot-com giants begin to impress this earnings season with improving cost controls, there will come a time when Baidu should follow suit by cashing in on its market dominance. There's still no denying that paid search is the juiciest niche online. Folks searching for stuff is a dinner bell to merchants and service providers looking to drum up new leads. Baidu's still the undisputed top dog in China. As long as that leadership goes uncontested, it's just a matter of putting up with the bottom-line speed bumps along the way.

Baidu will be fine, and if investors don't feel like taking advantage of Tuesday's 15%-off sale to buy into the former dot-com darling, then it's commendable to see Baidu take matters into its own hands with Thursday's announced buyback.

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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