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3 Things That Could Take Baidu Above $200 Again

By Rick Munarriz - Jan 13, 2016 at 9:06AM

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China's leading search engine is holding up better than its recent stock price action would seem to suggest.

Image source: Baidu. 

Some mile markers seem so far away. Shares of Baidu (BIDU 1.58%) have closed below $200 for 21 trading days in a row. It had closed above $200 for 16 consecutive days before that. 

It's not necessarily Baidu's fault. Investors turned on Chinese growth stocks -- again -- late last year. Things haven't gotten any better in 2016, as concerns mount about China's economy.

The slump comes at a peculiar time, because some things are starting to turn Baidu's way lately. Short interest -- after hitting a 52-week high of nearly 9.4 million shares as of mid-December -- slipped to 7.9 million by month's end. Profit targets which had been perpetually lowered through 2015 as Baidu's margins contracted, have actually inched higher in recent weeks for Baidu's recently concluded fourth quarter as a couple of Wall Street pros increased their income forecasts.

Naysayers are cashing out. Analysts are getting more optimistic. Isn't this the kind of climate that would result in a rising stock price instead of the declines that Baidu shareholders have been experiencing?

It's not as if search engines have fallen out of favor with growth investors. Google's parent company hit a new all-time high two weeks ago. Baidu should be at the right place at the right time, but the market souring on Chinese equities in general finds it at the wrong place at the wrong time. 

Let's go over three things that could turn Baidu's stock around.

1. Margins can turn around
Baidu is more than just a search company these days. That's smart -- it's taking advantage of its broad reach to introduce offerings that are incremental to its top line -- but it's also stinging profitability in the near term.

Net profit margins have been cut in half since peaking in 2012, according to S&P Capital IQ data. Baidu's bottom line has been betraying its top-line growth, and that has kept stock gains in check. If the dot-com giant can return to the glory days when earnings were growing faster than revenue it would go a long way to restoring Wall Street's faith in the stock. 

2. China sentiment can improve
If you think stateside investors have had a rough start to 2016, check out China. In a world of cascading stock prices worldwide this young year, the Shanghai Composite Index is the leading loser with a 15% slide through 2016.

Baidu has actually held up better than that, keeping its year-to-date percentage loss in the single digits. That's how things have usually gone for Baidu, seen by many investors as one of the safest Internet growth stocks in China. It still wouldn't help if investors return to Chinese stocks the way they did during the first half of last year. 

3. Baidu can make more savvy acquisitions
Shares of Baidu took a hit a couple of years ago on fears that it didn't have enough skin in mobile, and it went out and snapped up the leading app marketplace provider. From travel portals to group-buying sites -- from streaming video to a stake in Uber -- Baidu has put its cash to good use as it spreads its eggs across various online baskets. 

Baidu has plenty of money. It had more than $11 billion in cash and short-term investments at the end of September, and that sum keeps growing. It's been using some of its idle cash for buyings -- something that helps profitability on a per-share basis -- but the bigger splash could come from game-changing acquisitions. 

Baidu may be out-of-favor now, but it has the power to turn that around. 

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. 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.

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