News Analysis date published New: 
Thursday, October 4, 2012 - 11:30
New Date created: 
Thursday, October 4, 2012 - 12:14
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Thursday, October 4, 2012 - 11:30

The Last Time the "Google of China" was this Cheap, it Gained 30%

Thursday, October 4, 2012 - 11:30am

It seems like every investor has one of those decisions he or she truly regrets -- whether it was selling gold at $800 an ounce, bypassing Google's (Nasdaq: GOOG) IPO or liquidating their investment in Apple (Nasdaq: AAPL) at $200, $300 or even $400 a share. If they could only go back in time, then things would be different.

But what if you had an opportunity to pick up a stock with that's had the kind of growth that gold or Apple has had during the past few years, along with the dominant market share of a company like Google or Amazon.com (Nasdaq: AMZN)? Would you at least dip you toes in and start accumulating shares? Or would you take another pass, hoping for something even bigger and better to come along?

Well, after I tell you about this stock, I bet you'll at least start thinking about buying it.

This won't be the first time you've heard about this stock or its comparisons to leading tech giants like Google and Apple. But its current share price makes Chinese Internet search provider Baidu (Nasdaq: BIDU) one of the few places where you can acquire massive earnings growth and controlling market share at ground-floor pricing.

As the most popular search engine in China, Baidu serves close to 500,000 advertisers and is also among the top 10 websites in the world based on site traffic. That's a powerful position when you consider that China has more Internet users than any other country and that the country is rapidly increasing broadband usage. In 2011 alone, the Chinese Internet search market grew by a whopping 61%, with Baidu controlling 79% of that market share, followed by Google at a paltry16%.

The company's financials are enough to cause investors to salivate. Year-over-year revenue is forecast to grow 59% in 2012 and 44% in 2013 to more than $6 billion, averaging at least 33% annually during the next five years.

With a seismic three-year return on assets of 30% and three-year return on equity of almost 40%, Baidu knows how to put its capital to work and how to get the most out of its existing resources. Most recently, the company took a significant stake in Chinese travel site Qunar, a deal that's paying off thus far. For instance, Qunar's revenue for the first half of the year has reportedly doubled, as slower growth in China has forced cost-conscious consumers to search for travel deals online, which in turn has generated more advertising sales.

Compared to other players in the industry, Baidu's trailing price-to-earnings (P/E) ratio of 39.6 and forward P/E of 21.9 are significantly below their peer-group averages of 45 and 33 respectively, leaving the company trading at a double-digit discount to the industry. Furthermore, the current price of $112 a share offers interested investors the opportunity for a 40% gain if the stock ends up climbing back above its 52-week high of $154, as I suspect it could.

The stock's technical signs show an interesting trend. It's currently trading below its 200- and 50-day moving averages, ($123 and $116, respectively) which normally doesn't serve as a flashing "buy" signal. However, something interesting happens to Baidu when it trades between $120 and $100. As you can see in the chart below, each time the stock has fallen into this trading range during the past year, it has responded with a vengeance, rewarding investors with profits of 30-40% on multiple occasions.


Risks to Consider: Baidu's strengths can be seen in multiple areas, but the stock's recent performance as a result of China's slowing economy and increasing competition are legitimate concerns. Sohu.com and Tencent Holdings are two other Chinese companies with strong franchises that represent the third and fourth leading players in web search. Along with Sina Weibo (the Twitter of China) and RenRen (the Facebook of China), they are threatening to take market share and advertising dollars away from Baidu through alternative revenue channels such as gaming and social networking -- areas where Baidu doesn't necessarily have the upper hand or industry-leading technology.

Action to Take--> But while there is no doubt that some of these companies have the potential to erode market share and develop revenue streams in areas outside of Baidu's focus and strengths, the company's early market leadership, well known brand and solid financial position outweighs threats from the competition.

China may be in for a harder-than-expected landing, and the global economy is facing some headwinds, but this is one stock you may want to continue to own for years to come. Expect Baidu to trade as low as the $100 range before its robust revenue growth, impressive earnings and compelling growth takes the stock to newer and newer highs. When that happens, you'll have wished you'd bought this stock while it was this low.

Robert Lara does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.