Baidu is the leading Chinese language internet search provider, through it's website Baidu.com. It is the largest website in China and fifth largest globally. The company captures 81.6% of internet search traffic in China and was voted number one out of the BrandZ top 50 most valuable Chinese brands. BIDU is basically a Chinese version of Google and a very successful one. It was founded in 2000 by Robin Li, now the wealthiest businessman in China. He used to work for Dow Jones & Company, where he developed search engine ranking algorithms (he received a U.S. patent for them), which served as a basis for Baidu.
The company makes money by selling advertising space to businesses and websites. The process is the same as with google: an advertiser bids for a certain keyword or ad space, and when a user searches for it, it gets displayed either at the top of the results or on a website the user visits. In addition to search, Baidu offers a range of other online products including: social-networking, UGC-based knowledge products, location-based products and services, entertainment, security products, mobile related products and services and specialized products and services for developers and webmasters.
China has in internet population of 600 million, and mobile internet population of 500 million. But with less then half the country connected, the penetration is far below developed countries. Baidu's video site Iqiyi already became number one, overtaking it's major rival Youku. The company also owns Qunar (QUNR) a major travel website and Nuomi, an online marketplace for entertainment, dining and health products. They also bought one of China's largest mobile game and app distribution companies, 91 Wireless.
Let's take a look at BIDU's financials:
The company makes money by selling advertising space to businesses and websites. The process is the same as with google: an advertiser bids for a certain keyword or ad space, and when a user searches for it, it gets displayed either at the top of the results or on a website the user visits. In addition to search, Baidu offers a range of other online products including: social-networking, UGC-based knowledge products, location-based products and services, entertainment, security products, mobile related products and services and specialized products and services for developers and webmasters.
China has in internet population of 600 million, and mobile internet population of 500 million. But with less then half the country connected, the penetration is far below developed countries. Baidu's video site Iqiyi already became number one, overtaking it's major rival Youku. The company also owns Qunar (QUNR) a major travel website and Nuomi, an online marketplace for entertainment, dining and health products. They also bought one of China's largest mobile game and app distribution companies, 91 Wireless.
Let's take a look at BIDU's financials:
As you can see, sales growth has slowed down for 78% in 2010 to 43% in 2013. Margins have also declined to 2009 levels, primarily because of a huge jump in R&D and sales expenses. Traffic acquisition costs (money that BIDU pays to other websites to direct traffic their way) have also increased faster than sales.
However, in the first quarter of 2014, Baidu grew revenues by 60% and profits by 24%, easily beating analyst estimates. CEO has warned before, that profit growth will slow down this year due to their sales efforts, which include paying handset makers to pre-install Baidu software on their devices. This will pay off enormously in the long run and Baidu knows that.
VALUATION
BIDU is trading at a forward P/E of 25, Price/Sales of 11.7 and P/B of 10.3. I have done a three stage DCF valuation with the following assumptions:
- forward net profit of 2.5 billion USD in 2015
- growth of 15% for the next 10 years
- terminal growth of 3% thereafter
However, in the first quarter of 2014, Baidu grew revenues by 60% and profits by 24%, easily beating analyst estimates. CEO has warned before, that profit growth will slow down this year due to their sales efforts, which include paying handset makers to pre-install Baidu software on their devices. This will pay off enormously in the long run and Baidu knows that.
VALUATION
BIDU is trading at a forward P/E of 25, Price/Sales of 11.7 and P/B of 10.3. I have done a three stage DCF valuation with the following assumptions:
- forward net profit of 2.5 billion USD in 2015
- growth of 15% for the next 10 years
- terminal growth of 3% thereafter
If I assume a 10% discount rate and 15% growth for the next 10 years, BIDU offers an upside of at least 20%. Valuing growth stocks is always a tough task, because their future cash flows depend on the growth rate, which might fluctuate significantly over time. I think Baidu has a very strong position in China, and has proven many times it can successfully launch new products and services, which generate consistent sales and earnings growth. When I purchase BIDU stock, my downside is limited (because of stop loss), while the upside offers a lot of room due to both company's and China's long term prospects. This is definitely a risk/reward situation that I like, so I have bought the stock on friday.
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