Combining Value, Growth and Momentum
10x Stocks - Searching for multibaggers
  • Blog
  • Performance
  • Investment strategy
  • About

Baidu (BIDU) - China's top search giant

7/7/2014

0 Comments

 
Picture
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:

Picture
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
Picture
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.
Picture
0 Comments



Leave a Reply.

    To make money in stocks you must have the "the vision to see them, the courage to buy them and the patience to hold them". And patience is the rarest of the three.  Thomas Phelps

    Follow @BestStocksNow

    Categories

    All
    Best Stocks Of 2013
    Best Stocks Of 2014
    HK Stocks
    Indian Stocks
    Long
    Uk Stocks
    US Stocks

    Archives

    April 2021
    January 2021
    September 2020
    August 2020
    May 2020
    August 2019
    July 2019
    June 2019
    February 2019
    May 2018
    August 2017
    July 2016
    February 2016
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    September 2014
    August 2014
    July 2014
    June 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013

    RSS Feed

Powered by Create your own unique website with customizable templates.