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VTCastle's review
Investment Sector: Equities Submitted by Vtcastle 
7 months ago Tags: baidu bidu Add Tag |
In my search to find another power house growth stock with the growth characteristics and niche domination as Google, I didn't have to look very far. Baidu.com is to China what Google is to the US. Its the leading search engine for the Chinese internet market, and has a business model strikingly similar to the US based marketing giant. However, I don't think Baidu.com will be rolling out any cell phones or go on a purchasing spree similar to Google anytime in the near future, but they have rapidly secured their status as the world's second largest internet marketing company.
Since August 2005, Baidu (NASDAQ: BIDU) has rocketed onto the American financial markets as a great growth story by increasing its value over 400% in 2 ½ years (Chart #1). The majority of the stock run up began in Spring of 2007 and has not looked back, with the exception a minor blip in November 2007.
Chart #1: 2 year chart of Baidu.com compared to the S&P 500
<u>The Numbers</u>
For any of us that were around in the early 2000 to 2002 stock bubble, the idea of a P/E ratio in the stratosphere still haunts us. In Baidu's case, the P/E ratio in 180 range makes many people cringe. However, with annual growth rates in the 100% to 200% and a net profit margin of 37%, it makes the high P/E ratio a bit more bearable.
In terms of Baidu's competition, everyone is essentially being left in the dust. Baidu.com is growing at nearly 4 times that of its industry competitors, as well a net profit being nearly twice that of those same competitors.
Baidu's future earnings, BIDU seems to be on the right track by continually raising quarterly estimates by several percentage points even after a 20% to 40% increase from the following quarters. Even more impressive, they have no debt on the books!
Baidu is also investing heavily into R&D. With ventures like “Baidu TV”, they seek to further entrench themselves into a defensive role by keeping Google out of China by giving their users access to their own version of YouTube. See an excerpt from the Q3 2007 conference call:
“Baidu TV is, to put it in very simple terms, the typical TV commercial that we sell, that is always on TV screen now; if you go onto one of your favorite websites, and the website happened to be our Union member, when you go to their web page, and on the bottom right-hand corner as it currently stands, there will be a video clip. That’s the TV commercial that will appear.”
- Shawn Li, CFO (referenced from Seeking Alpha)
R&D has seen a 50% increase in expenses mainly due to increasing headcount, but like any business its necessary to invest early if long term gains are to be made. With no debt on the books, these R&D costs should be easily absorbed without worry.
Dealing with a high P/E stock.
One technique useful in dealing with a high P/E value stock is to be apprised of its trading tendencies by using technical analysis. You do not need to be a daytrader by any means, but it can help you determine a positive or negative up trend or even help you identify a good entry point. See chart #2 for an example relating to Baidu's trading pattern.
Chart 2: 6 month daily candlestick chart of BIDU.
Analyzing a stock in this manner does not overrule any type of fundamental analysis, but simply provides a method of analyzing the stocks trading pattern. Using the 20/80 Fast Stochastic (bottom segment) allows identification of an overbought / oversold indication and can be useful in knowing when to buy and when to sell (or short).
At this time, BIDU has a long history of a positive uptrend with a lower support level close to the 50 day moving average (orange line) but also tends to bottom on the 21 day moving average (red line). The horizontal line displays that a resistance level around $420 has been tested twice. Eventually, the upward trend will meet the resistance level and when this happen, the stock can make a substantial move. Given Baidu's strong fundamentals and past stock performance, its a reasonable assumption this resistance level will be broken.
As of today, the stock is once again testing its lows and should see a nice rebound one the fast stochastic reaches an undersold position.
<u>Reasons to pull the trigger.</u>
Growth stories like Baudi <u>do not</u> come around often. It is a very well managed company that has no debt and strong market demand for its product. With the growing industrialization of China's middle class, Baidu can not only retain its spot as the #1 internet search engine in China but also keep Google out of the picture. The earning potential from an ever growing user list will fuel rapid growth, and if managed properly as management has done up to this date, Baidu will do very well in the future.
The closing price of BIDU from the previous close is on January 3, 2007 was $375.09.
Disclaimer: Author does not own this stock, but will be purchasing shares in the near future. As always, this is for informational use only and should not be endorsed as a professional recommendation.
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5 comments ↓
Free Lance Writer at Affordable Web Design and Marketing
Chairman and CEO at Labi Group
Thanks for your comments. I plan on posting many more so check in often.
If any of you have a suggestion on a stock that you find intriguing, just let me know.
I'm a full time trader, so I appreciate any new ideas anyone might have.
VT
Chairman and CEO at Labi Group