Is (BIDU) getting crushed for good reason?

By: ispeculatornew
Date posted: 11.19.2008 (4:00 am) | Write a Comment  (1 Comment)

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Have you ever heard of Kidding right? You have never heard about the fourth most used search engine (according to Ok, I can see how the website being Chinese might explain part of it…:) Baidu made a big splash a few years ago when it was deemed the next Google and rose over 200% after its IPO.

Since then, it has been experiencing the growth you would expect from China’s top engine and its revenues have increased as well. They increased by over 100% last year. Just look at its latest income statements:

FQ3 2008 FQ2 2008 FQ1 2008 FQ4 2007
Revenue 134 115 80 77
Revenue Growth 16.49% 43.92% 4.36% 16.94%
Gross Margin 66.34 64.99 60.20 62.17
Research & Development 11 10 7 6
R&D/Sales (%) 8.51% 8.86% 8.95% 8.15%
SG&A 35 35 28 24
SGA&/Sales (%) 26.27% 30.56% 34.55% 31.30%
EBITDA/Sales (%) 0.00% 0.00% 0.00% 0.00%
Operating Margin 40.07% 34.43% 25.66% 30.87%
Pretax Margin 36.10% 34.22% 33.61% 35.32%
Tax Rate 5.38% 2.80%
Net Margin 37.85% 33.02% 25.52% 38.50%
EPS excl Extraordinary Items (not diluted) 1.4839 1.1124 0.60 0.87
EPS Growth (%) 33.40% 85.83% -31.53% 23.54%

Baidu is certainly a major growth story, however it got slammed by a major drop of 22% in the markets earlier this week when some reports out of China reported that it was doing something that even in China is considered to be very serious. When you searched for certain medications on their search engine, you would see results on the first page not of legitimate companies but of sellers of knock-offs, that were illegal. Bad? Yes, very. And this will certainly bring some legal issues to Baidu as well as bring a lot of other questions about its policies and how it is generating its revenues. But I still consider Baidu to be an attractive investment, mainly for these 2 reasons:

-Let’s not forget where this company operates: China. While the reportred practice is serious and would certainly bring massive problems to a US company, in China the playing grounds is very different as rules are not as clear and not as applied. What Baidu did was certainly illegal but we should not judge Baido according to US laws only.

-Its valuation has become very very attractive. Depending on what dates and estimates you are looking at, Baidu is trading at similar P/E ratios as Yahoo, which to me seems incredible when we look at the fiasco that Yahoo is in. Baidu has a terrific market position in perhaps the world’s top growth market, not exactly the declining market share & flat revenue position of Yahoo.

So overall, while it is certainly important to consider the impacts of the legal issues that Baidu is facing, I do consider Baidu(BIDU) to be a BUY. It could even be bough while going short Yahoo(the major risk to that would be a surprise new bid by Microsoft for YHOO).

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1 Comment

  1. Comment by admin — November 19, 2008 @ 11:32 am

    interesting note, it’s of course to early to speak about this, I see this as a longer time bet, but as of right now, BIDU is down another 11%… but with Yahoo down even more, the trade is actually up for the day…crazy hey?

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