Baidu Is Still a Buy

GuruFocus.com

- By Jonathan Poland

The largest search engine in the world's soon-to-be most prosperous country remains undervalued. For one, the Chinese yuan is just 15 cents per U.S. dollar, a rate that only has one way to go over time, up. Second, the company's price multiples remain much lower than those of U.S. rivals Facebook and Google.

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Baidu (BIDU)

P/E - 13.8x

P/B - 2.5x

P/S - 4.1x

Facebook (FB)

P/E - 20.2x

P/B - 5.4x

P/S - 8.5x

Google (GOOG)

P/E - 23.1x

P/B - 4.5x

P/S - 5.9x

Currently, the trade war is weeding out flaws in both countries' political systems. But the economics are pretty clear. Almost all of China's citizens have risen from poverty by becoming the producer nation to the world. In the coming decades, it will pivot and begin consuming more and more. Baidu and its search will continue to be integral to that pivot.

It's market capitalization is under $60 billion, and it's looking to earn over $4 billion this year. That it is trading at just 15x forward earnings borders on ridiculous.

As of September, it had roughly 150 million daily active users with 77% of its revenue from mobile devices. Baidu's newsfeed service embedded directly into its mobile app will only keep more users glued to their phones and help the company increase ad inventory and rates. Baidu's iQiyi (IQ) video platform garners even more attention with over 500 million users spending 6 billion hours a month on the site. iQiyi is a separate publicly traded company, and Baidu controls 93% of the votes.

Furthermore, Baidu is sitting on roughly $2.3 billion in cash and equivalents, and generates about $3 billion in free cash flow annually, giving it plenty of capital to continue its growth trajectory. With the company expected to release earnings in February, investors await the results of management's plans to divest interest in some of the company's business units.

In August, Baidu sold a 68% of its Financial Services Group for about $1.06 billion to an investor group led by TPG and The Carlyle Group (CG) in late August. It's also announced plans to divest a large portion of its global ad and tools business, keeping 34% of those outstanding shares. The reason is future thinking, where growth will come from the company's artificial intelligence (AI) products and services, currently focused on driverless automobiles.

All told, the stock remains a buy. From a pure numbers standpoint, if Baidu was priced fairly next to its U.S. counterparts, the market value would be closer to $80 billion or $225 per share, a 33% gain from today's trading price. Trade wars end, and this company is well positioned for the future of business.

Disclosure: I am not long/short any of the stocks mentoned.

Read more here:

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This article first appeared on GuruFocus.