(nasdaq: bidu) - collab.its.virginia.edu · myth: baidu is overvalued overview mispercep)on....
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M c I n t i r e I n v e s t m e n t I n s t i t u t e
McIntire Investment Institute At the University of Virginia
Prepared by David Pastore| Nov 10, 2011
(NASDAQ: BIDU)
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Recommenda)on/Ques)ons
Value Added Research (VAR)
Risks/Catalysts
Thesis Points
Mispercep)ons
Business and Stock Overview
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Agenda
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Founded January 18, 2000 by Robin Li
Largest Search Engine in China
Also operates in Japan
Produces Revenue through Ads
57 other search services
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Business Overview
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
M c I n t i r e I n v e s t m e n t I n s t i t u t e 4
Mispercep)ons Overview Thesis Points Catalysts/Risks VAR Recommenda)on
Users
Customers
Baidu Union Members
Serves 3 types of Online Participants
• Unique Pay for Placement (P4P) performance based marketing platform for its customers that is designed to effectively reach relevant users
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Share Price (Nov 9): 141.94 52-week Range: 94.33-165.96
Market Capitalization: 49.54B Avg Volume(3m): 9,754,770
P/E: 54.76 Forward P/E (fye Dec 31, 2012): 30.13
EPS: 2.59 Short Ratio: .6
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Stock Overview
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
M c I n t i r e I n v e s t m e n t I n s t i t u t e 6
Myth: Google Dominates the Chinese Search Market
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
M c I n t i r e I n v e s t m e n t I n s t i t u t e 7
Myth: Baidu is Overvalued
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
High P/E Overvalued?
NO! Continued and Sustainable Earnings make Baidu an Undervalued Stock
M c I n t i r e I n v e s t m e n t I n s t i t u t e 8
Myth: Baidu is Overvalued
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
Increased Earnings per Share = lower P/E
M c I n t i r e I n v e s t m e n t I n s t i t u t e
• China has largest market – Currently over 450 million
internet users – By 2013 expected users will
exceed 700 million
• Only 35% have Internet Access – Plenty of room for growth
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Enormous Growth Potential
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
M c I n t i r e I n v e s t m e n t I n s t i t u t e 11
China vs. U.S.
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
M c I n t i r e I n v e s t m e n t I n s t i t u t e 12
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
ARPU Growth
M c I n t i r e I n v e s t m e n t I n s t i t u t e 13
Baidu Continues to Innovate
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
• Offers 57 extra services • Following success of Google and Yahoo with Baidu Map & Baidu Knows • Baidu Forum • Also offer games, music, and online tv
M c I n t i r e I n v e s t m e n t I n s t i t u t e 14
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
M c I n t i r e I n v e s t m e n t I n s t i t u t e 15
Local Knowledge
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
Keenly understanding local tastes
Coopera)ng with
Government Censorship Laws
Home Field
Advantage
M c I n t i r e I n v e s t m e n t I n s t i t u t e
• Patents – Robin Li created and
patented RankDex algorithm
• Brand Name Recognition – Baidu already has
customer loyalty
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Barriers to Entry
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
Baidu has few direct Compe)tors
M c I n t i r e I n v e s t m e n t I n s t i t u t e 17
Earnings Growth
Overview Thesis Points Mispercep)ons Catalysts/Risks VAR Recommenda)on
Consistently Increasing Revenue and Earnings
Most recent quarter saw $654.7 million of revenue, 85% growth (yoy)
Last 3 Fiscal Years, Revenue has increased over 200% and Net Income over 300%
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2008 2009
2010
Net Income Total Revenue
M c I n t i r e I n v e s t m e n t I n s t i t u t e 18
Revenues
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
M c I n t i r e I n v e s t m e n t I n s t i t u t e 19
Risks
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Censorship Growth Ceilings
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Government Interference
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
M c I n t i r e I n v e s t m e n t I n s t i t u t e 21
Revitalized Competition
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
• Presently Google has mostly withdrawn from China • If they can manage to work around censorship and hacking, may return as a threat • Plenty of Capital to rebound
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Watch List
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
Baidu is collabora)ng with Facebook to improve their social networking-‐would rival leaders Renren and Kaixin0001
Infla)on and con)nued prosperity of China
Government Ac)on-‐new laws
M c I n t i r e I n v e s t m e n t I n s t i t u t e
• User 1 – “Baidu is China’s Google” – “If you’re in China or searching for Chinese sites, you use Baidu”
• User 2 – “Baidu is basically Google but with more features in Chinese. It’s a lijle clujered at )mes, but that doesn’t stop me from using it. Everyone uses Baidu.”
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Value Added Research
Overview Mispercep)on Thesis Points VAR Catalysts/Risks Recommenda)on
M c I n t i r e I n v e s t m e n t I n s t i t u t e 24
Value Added Research
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on
• User 3 – “It’s like Google, but in Chinese and it searches Chinese websites…More and more people are gelng used to it…I just read an ar)cle about how they are also branching out to Japan, Thailand, Egypt, and India. They keep improving.”
M c I n t i r e I n v e s t m e n t I n s t i t u t e
Thesis points: 1. Plenty of Room to Grow 2. Innovative Services 3. Barriers to Entry 4. Strong Earnings
Ø Compelling Long with Potential for Great Returns
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Summary and Recommendation
Overview Mispercep)on Thesis Points Catalysts/Risks VAR Recommenda)on