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3 Stocks That Baidu Should Buy

By Rick Munarriz – Updated Apr 6, 2017 at 1:48AM

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Baidu may be going on an acquisition hunt.  

Baidu (NASDAQ:BIDU) has growth on its mind -- and not necessarily of the organic variety.

In a recent interview with Bloomberg, CFO Jennifer Li hinted at possible acquisitions. "People approach us and we get to look at a lot of things," she told Bloomberg. "Internet is at an early stage of its development. It's dynamic, and we need to stay ahead."

Baidu has had no problem staying ahead of the competition, for now. It commands roughly two-thirds of China's search-engine market. Google (NASDAQ:GOOG) is hungry but remains a distant second in China.

That may not be forever, though.

Google has an exclusive deal to provide search results for China Mobile (NYSE:CHL) customers, the country's largest wireless carrier. Baidu had to settle for a smaller carrier. That's a huge move for Google. China Mobile has 488.1 million subscribers, significantly more than China's entire Internet-using population. As China mobile customers eventually begin upgrading their handsets to Web-surfing gadgetry, Google has an easy path to gaining market share.

Baidu is growing just fine on its own. Analysts see the leading search engine's bottom line growing by 32% this year and accelerating to a 42% spurt in 2010. That's great, but wouldn't it be nice if it could snap up a few smaller Web-based growth stocks? Deals would either pad the company's heady growth or give it a little breathing room in case there's some weakness in its organic search business along the way.

Since Baidu isn't necessarily cheap -- trading at 48 times this year's projected profitability and 34 times next year's earnings target -- nibbling on profitable dot-coms would probably be accretive to Baidu's bottom line.

So what should Baidu buy? I have a few names. Let me know whether you agree.

Sohu.com (NASDAQ:SOHU)
Now that Sohu has successfully taken its rapidly growing online gaming business public, it's back to being an attractive new-media company that just happens to have a majority stake in Changyou.com (NASDAQ:CYOU).

Sohu has its own search engine, called Sogou -- but it's a speck on the map compared to Baidu. The real gems are the offshoots within its portal, such as ChinaRen (China's largest alumni club, with 77 million registered users) and focus.cn (Beijing's top real estate site).

Baidu knows how to draw lead-hungry traffic to its iconic search engine, and Sohu has the destinations to keep users close until they click away via revenue-generating ads. Sohu is also trading at just 16 times this year's targeted profitability, so a move for Sohu could be very accretive to Baidu's earnings.

Ctrip.com (NASDAQ:CTRP)
If the initial stateside success of Bing has taught us anything, it's that even Google's model can be improved upon. One of the six channels on Bing's landing page is travel, which gives users easy access to scour airfare and lodging rates.

Ctrip is China's leading travel portal. It isn't exactly cheap, at 36 times this year's net income estimates and 28 times next year's forecast. Ctrip also isn't growing as quickly as Baidu. Of course, that may make this the best time to acquire Ctrip, before the travel industry gets back on track in China and Ctrip will be confident enough to go it alone.

Focus Media (NASDAQ:FMCN)
Within the next few months, Focus Media should complete the sale of its healthiest advertising businesses to SINA. It's just as well, since it would be a stretch for Baidu to get behind digital poster frames and LCD monitors that broadcast sponsored eye candy.

Mr. Market is ignoring the businesses that SINA isn't taking, but Baidu shouldn't. Of the $67 million that Focus Media scored in revenue from continuing operations this past quarter, $47 million came from online advertising. This is the lower-margin brand-based display advertising that Baidu has skirted in its pursuit of its chunkier paid-search stronghold, but Focus Media will probably come cheap in an area where Baidu is likely to expand into anyway.

Get moving, Baidu
If there's anything that I would improve on in Li's quote to Bloomberg, it's that the whole "people approach us" thing suggests that Baidu is entertaining companies that want to be acquired, instead of being a little more aggressive and seeking out the puzzle pieces that make more sense.

I'm sure that's not everything. I trust that Baidu is compiling its own shopping list. Let's just hope it happens sooner rather than later. Baidu's stock has nearly tripled since bottoming out six months ago, so its stock should be a great tool to seal the deal, if its healthy cash balance isn't.

Get going, Baidu! You can't keep the competition far away forever.

Other headlines to read before the shopping trip:

Baidu, Google, and Sohu.com are Motley Fool Rule Breakers recommendations. SINA is a Motley Fool Stock Advisor selection. Focus Media is a Motley Fool Global Gains pick. Ctrip.com International is a Motley Fool Hidden Gems recommendation. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been to China once, and he relishes admiring its dot-com revolution from afar. He owns no shares in any of the stocks in this article and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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Stocks Mentioned

Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$118.75 (-0.06%) $0.07
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$98.74 (-1.40%) $-1.40
Focus Media Holding Ltd. Stock Quote
Focus Media Holding Ltd.
FMCN
China Mobile Limited Stock Quote
China Mobile Limited
CHL
Sohu.com Inc. Stock Quote
Sohu.com Inc.
SOHU
$17.14 (-2.06%) $0.36
Trip.com Group Limited Stock Quote
Trip.com Group Limited
TCOM
$25.99 (1.52%) $0.39

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

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