Baidu's opportunities for growth
There are already 650 million Internet users in China, roughly double the size of the entire U.S. population. However the Internet penetration rate in China is still just just 46%, compared with nearly 90% in the United States. Even a 10% higher Internet penetration rate in China would mean about 140 million new potential customers for Baidu.
ANZ Greater China economists Li-Gang Liu and Louis Lam reported in May that they project 326 million people will move into the middle class in China by 2030. As China's citizens continue to move into the middle class and have access to computers and smartphones, the number of potential Baidu customers with Internet access will continue to increase by the millions each year. http://uk.businessinsider.com/chinas-rising-middle-class-will-create-opportunities-the-world-has-never-seen-before-2015-5#ixzz3kbovukxb
Since Google leftChina in 2010, Baidu has been nearly unchallenged as the main search service, and now it has around a 70% market share in China, with offerings similar to those of Google, including search, advertising, and a host of digital services such as video streaming.
Other than a growing user base, Baidu also has a long-term opportunity in its moon-shot ideas, just like Google. Baidu is working on its own "connected" car, and some reports say Baidu has teamed up with Daimler and BMW and could even have a driverless car to market before Google. Baidu also recently released an online health portal that serves as a patient-doctor booking tool. These kinds of long-term new business initiatives are investments that could lead to more major growth in the future if one or more of them take off.
Is Baidu a buy now?
Baidu does face risks during this Chinese sell-off. For one thing, even though the company trades in the U.S., it's still a company mainly serving the Chinese market, and a recession in China would hurt its short-term sales. In addition, herd-investment mentality could continue pushing shares lower on fears of a Chinese market crash. Finally, because Baidu makes its money in Chinese yuan but lists revenue in U.S. dollars, the recent government-implemented yuan devaluation will slightly lower Baidu's earnings in the next release.
Still, Baidu's valuation is incredibly cheap right now. Its current P/E of 24 looks a little high, but consider that it's expected that 2016 year-end earnings estimates put the forward-looking 2016 P/E at an incredible ratio of just 3. Baidu's growing Chinese Internet search market, big new initiatives such as its healthcare booking service, and its relatively minimal ties to the Chinese stock market meltdown all look like very attractive reasons to bet on Baidu at these low prices.
Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool owns and recommends Baidu, Google (A and C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.