For the last three quarters, hedge fund Lone Pine Capital has accumulated 7.8 million shares in this Chinese search engine business.
Baidu (BIDU)
from Cabot Stock of the Month
Baidu’s (BIDU) appeal can be characterized as Story, Numbers and Chart, or as Paul Goodwin, the analyst of Cabot China & Emerging Markets Report likes to put it, SNaC.
The story is that Baidu is the Google of China. Just as Google makes money by charging advertisers to put their ads in front of potential customers in almost every country in world, Baidu does it in China, the country from which Google chose to retreat when the Chinese government got a little too heavy-handed about helping the hometown team.
Baidu isn’t as dominant in China as Google is in the U.S. (and other countries), but it is the leader—and it’s almost certain to get a whole lot bigger. The company’s biggest challenger these days (in Google’s virtual absence) may be Qihoo 360 (QIHU), which leads in the fast-growing mobile search department.
But Baidu has been working on improving its competitive position, and that’s clearly beginning to pay off—which brings us to the numbers.
Baidu has been growing revenues and earnings every year since it came public in 2005. Even in the tough times of 2009, both revenues and earnings grew 40%! And now, coming off a relatively slow period last year, revenue growth is accelerating, hitting 59% last quarter. In fact, in that quarter, the company beat analysts’ estimates for both revenues and earnings, so those analysts raised their estimates for the years ahead. Looking ahead, the growth of consumerism in China almost guarantees that there’s far more growth to come.
Last but not least is BIDU’s chart. For the first five years of its life, BIDU was a hot stock, very volatile (mostly on the upside) and trading at nosebleed valuations—its P/E topped 50 at some point in every year until 2012. But in recent years it’s calmed down a lot. First, from mid-2011 through mid-2013, there was a prolonged decline that slowly wore out uncommitted investors. Then there was the rebound in the second half of 2013; it rewarded investors/traders who were nimble—but it didn’t last. 2014 brought a renewed consolidation phase that took the stock down as much as 23% at the low of the growth-stock correction before it began its current rebound. In fact, it was only last week that the stock was able to climb back above its uptrending 200-day moving average.
Now, this chart will not be immediately attractive to everyone. It’s certainly possible the consolidation will continue—in fact a pullback to the 200-day moving average at 159 is possible, especially if the market remains choppy. But when I consider the main factors in Baidu’s Story, Numbers and Chart, I conclude that the stock—currently with a P/E of 31—has far more upside potential than down, and thus I feel comfortable giving it a buy right here.
Timothy Lutts, Cabot Stock of the Month, www.cabot.net, 978-745-5532, June 2014