Will Baidu’s Momentum Continue?

With shares of Baidu (NASDAQ:BIDU) trading at around $94.72, is BIDU an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Baidu is an easy winner for search in China: it’s gaining in ground in mobile, and it’s now also the largest online video platform in China. Despite Q1 margin declines, margins are still solid, and year-over-year revenue and earnings were impressive. However, revenue and earnings declines on a sequential basis. That makes the story a little more difficult to read. In these situations, it’s often better to look at the big picture. And in this case, revenue and earnings have consistently improved on an annual basis. In addition to these positives, valuation is fair. Baidu is trading at 19 times earnings while the industry average is 21 times earnings.

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On the negative side, costs have also increased. These costs have related to infrastructure, marketing, R&D, and online video platform. Looking ahead, Baidu will increase spending to improve its mobile position. Another negative is increased competition. Current competitors include Sina Corporation (NASDAQ:SINA), Sohu.com Inc. (NASDAQ:SOHU), and Qihoo 360 Technology Co. Ltd. (NYSE:QIHU).

The chart below compares traffic performance. Pageview-Per-User, Time-On-Site, and Bounce Rate (one page per view) are all based on the past three months. Note: Weibo.com is owned by Sina.com, and 360.cn is owned by Qihoo.com.

     Global Rank     China Rank Pageviews-Per-User     Time-On-Site     Bounce   Rate
Baidu.com

5

1

-8.73%

-7.00%

+2.00%

Sina.com

3444

658

-3.52%

-7.00%

+5.00%

Weibo.com

27

6

-4.73%

-3.00%

+3.00%

Sohu.com

50

10

-4.26%

-2.00%

+6.00%

360.cn

7

12

+4.60%

+18.00%

+3.00%

 

The chart below compared fundamentals for Baidu, Sina, and Sohu.

BIDU SINA SOHU
Trailing P/E 19.59 125.68 29.91
Forward P/E 15.20 32.55 18.64
Profit Margin 44.21% 5.88% 7.71%
ROE 44.08% 2.81% 14.13%
Operating Cash Flow N/A N/A 376.06M
Dividend Yield N/A N/A N/A
Short Position N/A 2.60% 8.30%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Mixed

Baidu has performed well over three-year and one-month time frames. However, it hasn’t performed well over a one-year time frame or year-to-date. Most importantly, it has underperformed its peers for every time frame listed below.

1 Month Year-To-Date 1 Year 3 Year
BIDU 9.59% -5.55% -17.90% 35.06%
SINA 28.77% 18.62% 12.16% 64.15%
SOHU 31.30% 33.08% 50.21% 42.21%

At $94.72, Baidu is trading above its 50-day SMA, but still below its 200-day SMA.

50-Day SMA 88.57
200-Day SMA 95.03
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E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Baidu is weaker than the industry average of 0.10, but it still qualifies as normal.

Debt-To-Equity Cash Long-Term Debt
BIDU 0.40 5.39B 1.90B
SINA 0.00 681.93M 0.00
SOHU 0.19 951.67M 270.50M

E = Earnings Are Strong

Revenue and earnings have consistently improved on an annual basis.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 461 652 1,171 2,248 3,580
Diluted EPS ($) 0.44 0.63 1.53 3.02 4.79

As stated earlier, year-over-year numbers are impressive, but sequential numbers are cause for concern.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 677.10 858.80 994.60 1,017 961
Diluted EPS ($) 0.85 1.24 1.37 1.28 0.95

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

The industry has been performing well as of late, but that could be said about most industries throughout the world. The question is what the future holds. Nobody knows for sure, but as long as Chinese economic data isn’t regulated, numbers will continue to be manipulated.

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Conclusion

Baidu is the largest search Internet Information Provider in China. That’s the good news. The bad news is that competition and costs have increased. Any numbers coming out of China should also be looked at under a microscope. Simply looking at real exports and imports, the numbers don’t add up. Exports have been over-invoiced, and imports have been under-invoiced. This has led to a manipulated GDP number. Therefore, there is potential for a significant slowdown in Chinese stocks if the truth is revealed. Then again, this has been going on for a long time. Who knows? Maybe it can last forever.

All factors considered, Baidu is a WAIT AND SEE.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions.