february stock pitch: baidu (bidu)
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“The Chinese Google” Founded in 2000
Compare baidu.com to google.com Most revenue comes from online marketing
The dominant internet search engine in China Key business driver
Helps new ventures 79% Revenue Share 470,000,000 search users in China
86% prefer Baidu
Continued Overview Clear push towards mobile
Market leader in mobile search 80 million active users
Gateway for discovering apps Search “accounting apps”, receive relevant
results
Moving towards diversification Looking to diversify revenue stream Most recently acquired the remaining portion
of Nuomi.com Similar to Groupon
Risks & Concerns While Baidu dominates PC search, the
mobile market is very young and anybody’s game Mobile will experience the most growth Mobile search is less profitable
Smaller screen size & slower internet speed Much more competitive
Very volatile for trading Beta: 1.63 - 2.38 52wk Range: 82.98-185.5
Risks & Concerns Continued
Baidu is actively expanding into non-search areas Much like GOOG: YouTube, Maps, etc. May affect overall margins
Baidu relies heavily on small/medium sized businesses Rely on Baidu to reach customers An economic downturn could be
particularly hard on revenues
Solid Foundation Dominates the PC market and analysts believe this
will not change any time soon
Baidu’s data helps improve other wings of business Can monitor each click
Narrow economic moat Recent diversification fends off competition
Baidu Knows, Music & Video Streaming, Etc. Heavily built on Network Effect
Moat is limited by increasing competition and the rapid tech cycle
Growth China is home to as many as 50 million
small-to-medium enterprises Expected growth rates in double digits for
next few years
E-commerce is expanding rapidly in China
Internet penetration rate in China only at 42% Government plans to invest $323 Billion by
2020 to expand connectivity
Growth Continued Acquisitions
Sitting on $33 Billion cash pile Free cash flow at $9,430,000
Stable Health Quick Ratio of 4.1 ROA & ROE much higher than
industry average
Revenue Growth
Baidu Revenue 2008 2009 2010 2011 2012 Online Marketing Services $3,194,461.00 $4,445,410.00 $7,912,869.00 $14,489,767.00 $22,245,643.00 Other Services $3,791.00 $2,466.00 $2,205.00 $11,019.00 $60,383.00
*Years ended 12/31*In RMB (Chinese Yuan)*In thousands expect per share and per ADS data
Net income has increased from $1,048,108 to $10,456,028 during this period
Biggest Selling Point Price/Earnings
Market Value PS / EPS Between 2005 and now, P/E has shrunk from 344.8
to 32.69 Mainly due to expanding revenue Revenue growth (3 yr avg.): 71.2%
Industry avg.: 22.6% Forward P/E estimates: 3-5 Industry Average: 43.5
Fair Value estimate recently changed from 140 (10/30/13) to 206 (1/27/14) per Morningstar Price/Fair Value has dropped from 1.17 to around .76
Verdict Soft Buy
I believe Baidu has the ability to reach 200 and higher within the next year Around 25% annual return
Primary concerns with price Stock has increased dramatically in value in
the past year Many along for the ride may drop out
Points of optimism P/E shrinking, revenue increasing Financially stable