This article is sponsored by College Readiness Consulting!
About Baidu
I have my reasons for having a pit develop towards the bottom of my stomach when a Chinese stock pops up on my equity research radar.
The primary reason is composed of a main course of geopolitical tensions with a dash of ignorance.
No matter how well performing or powerful a company based in China might be, I am usually one to think of the downside before the upside and with that, am flooded with thoughts surrounding intranational power dynamics within mainland China as well as prevailing tensions between and related to the United States and China, which could inevitably lead to Chinese companies being delisted from US exchanges (yes, it is rather farfetched, but stuff happens and I’ll just say hardly anything would surprise me at this point within the sphere of geopolitics), along with ounces of largely self-induced ignorance of consumer customs and behavior(s) in China that would indisputably dictate a company’s operational performance and with that, more than likely its future stock price and performance as well.
Therefore, in preparing a draft for this particular stock analysis article, I took the plunge and, oddly enough, even acquired a little comfort in doing a good amount of preliminary due diligence on Beijing, China-headquartered technology company, Baidu.
Mainly, following my rather extensive research treasure hunt, I came to the conclusion that Baidu is basically China’s Google.
Baidu is, indeed, a gigantic technology company that just so happens to dominate the online search engine market in China, holding somewhere in the neighborhood of 67% of the internet search engine market share in the region alone. Just like Google, Baidu generates the bulk of its revenues through essentially selling valuable space on its platform, where businesses and other organizations can bid for prime page and relative rank real estate on the search engine’s platform, also generating a notable amount of revenues through directly selling advertising space when one looks something up on the platform, just like Google Ads, where organizations opt to pay for higher ranking and user visibility on the search engine.
Also, similar to Google, Baidu also works vigorously within the artificial intelligence (AI) landscape, currently working on some promising projects in machine learning, one of the company’s avenues being in autonomous driving, not to mention that, of course, like Google, Baidu also does some damage within the cloud computing segment of the technology sector, albeit not quite at the same scale as Google or level as other competitors like Amazon Web Services (AWS).
Please believe me when I say that I am not trying to grossly minimize what this company does and just making it seem like it is just a Chinese Google, however, in essence, in more ways than one this is what I deem to be the best way to view this company, and I am frankly correct, all things considered.
This being the case, one of my favorite things about Google is the fact that while there are definitely certain periods of cyclicality in the search engine and related advertising spaces, Baidu, also like Google, is a leader in the market and holds all sorts of pricing power and even when periods of softening in ad spend arise, Baidu has a notable (and obvious) edge in China in that it has the most reach in the Country, making it increasingly challenging for advertisers to reasonably consider advertising on any other platform(s) in the region, obviously boding well for Baidu and its extended ad moat.
Oh, and it seems as though Baidu has a strong positive relationship and track record when dealing with the Chinese government, which, especially in the context of my previously outlined apprehensions, is a great positive for both the company and potential and current shareholders, in my humble opinion.
I hope you enjoyed my introduction of the company and now is just about the right time to dive into the company’s hard financial figures and other pertinent metrics so as to determine, on the basis of utmost objectivity, whether or not Baidu’s stock (NASDAQ: BIDU) is worth bai-ing and holding, as Kanye West said in “Diamonds From Sierra Leone,” “for-eva, eva, for-eva, eva.”
Baidu’s stock financials
In getting this show on the road, it can be found that Baidu’s American publicly issued shares are trading at a price of $83.95 with a market capitalization of $29.44 billion, an associated price-to-earnings (P/E) ratio of 11.04, all while not issuing a regular annual dividend to its stockholders at the moment.
The company not paying out an annual dividend checks out, as even some of the world’s largest technology companies opt to forgo bleeding cash in the form of a dividend, usually because it would more than likely act more as a cash drain on potential future value accretive projects and technologies to both fully invest in and build off of in order to remain competitive, with the rise of artificial intelligence being a perfect example.
It just doesn’t make all that much fiscal sense in the long run, and I understand that.
With respect to the company’s valuation, Baidu’s prevailing price-to-earnings ratio hints at the fact that its stock (NASDAQ: BIDU) is trading at appealing levels, well below the fair value benchmark of 20, which is especially impressive when pondering all of the growth this company has encountered as a result of the recent AI uproar, but I also have my fair share of suspicions that shares are also trading at a discount due to investors abroad, such as myself, having a general aversion towards investing in specific Chinese companies.
Nevertheless, aversion can certainly create remarkable opportunities for those with the right stomach and investment temperament.
When it comes to Baidu’s balance sheet, the company’s executive leadership team is in charge of responsibly monitoring and deploying just about $57.3 billion in terms of total assets which is also accompanied by $22.9 billion in terms of total liabilities, which is just about as war-ready, AI-growth capable and trim of a balance sheet I’ve ever seen, at least in more recent history. Primarily, Baidu has more than double the amount of total assets than it does cumulative liabilities, granting it a lot of room to invest and add oil to its growth engine, both through showering its already existing businesses with dry powder but also through eyeing and eventually following through on strategic acquisitions of smaller and nimbler technology companies within the scope of China.
This is a confidence invoking balance sheet and I really do not need to say anything else on the matter.
As it relates to the company’s income statement, Baidu’s annual revenues spanning from 2019 and 2023 have been moving in the right direction, all things considered, starting out in 2019 at a value of $15.4 billion, rising the following years to $16.4 billion, $19.5 billion, $17.9 billion, up to its latest reported revenue metric of $18.9 billion, peaking during the COVID-19 era, which makes complete and utter sense being that as lockdowns and other restrictions were being enforced in China, many had little to nothing else to do but surf the web, and not having access to Google over in China limits one’s options to Baidu, and basically Baidu only.
More eyes means more advertisers and it seems like this company capitalized and following what has so far been the aftermath of COVID, continues to do so.
Regarding the company’s cash flow statement, Baidu’s total cash from operations during this exact same timeframe have ranged between a low of $3.1 billion (2021) and a high of $5.1 billion, as reported in 2023, averaging out somewhere in the $3 billion area code during all of these years, which is, I believe, a bit of a reason to be optimistic in the sense that the company’s cash flows have evidently increased in most recent history. Perhaps Baidu’s executives have found new ways in which it can become more profitable through its current business segments and/or it has become more focused and intentional about cutting out segments that aren’t as profitable.
Regardless of rhyme or reason, I like seeing this company’s cash flows trending upwards in more recent years, but wouldn’t anyone?
Baidu’s stock fundamentals
On the basis of the company’s listed net profit margin, Baidu’s, according to Charles Schwab’s platform, is pegged at a healthy 15.57% on a standalone basis, even though it is clearly less than that of Google’s parent company, Alphabet, which boasts an even healthier net profit margin of 27.49%.
Nevertheless, I think there a few sensible reasons as to why this is the case, one of them being Google’s scale and broad business diversification, and profitable business diversification at that, as Google owns a lot of other tech-focused, scaled businesses than Baidu, including YouTube, Google Cloud, Mandiant, Waze and Fitbit, to name a few.
Additionally, it doesn’t hurt that Google also happens to own an even larger portion of the search engine space globally than Baidu, enabling it to better cement a higher net profit margin through this concentration and its reputation among advertisers all over the world.
Nevertheless, on the sole basis of Baidu, its current net profit margin isn’t all that bad given these bits of context and as its smaller business units continue scaling up, I think it is reasonable to expect some more net profit margin padding in the years to come.
Should you buy Baidu stock?
Barring my general thoughts surrounding investing in Chinese companies, Baidu is putting up some pretty good numbers, and the fact that it maintains a favorable relationship with China’s current governmental regime is something that will surely help a prospective shareholder such as myself sleep better at night.
On the basis of the numbers I’ve presented, Baidu’s net profit margin is more than solid, its market concentration is China is a net positive, from my perspective, its cash flows are poised to continue growing, its most recent historical annual revenues have shown some general growth and its valuation is quite favorable, especially when considering the current technology boom environment as it relates to equities, with other American technology companies trading at multiples that are far more inflated than this company’s.
In the long run, given the information I have in front of me I think the potential rewards outweigh the risks with this company and its stock (NASDAQ: BIDU), and that is exactly why I am offering Baidu a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
© 2024 MacroHint.com. All rights reserved.