Our first pick is a Chinese search engine company that blew last quarter’s earnings estimates out of the park—reporting $7.92 per share, vs. the $7.17 estimate. And earnings forecasts continue to move up, with 18 analysts increasing their forecasts in the past month. Our second recommendation today is for some nice profit-taking.
Buy: Baidu (BIDU)
From Cabot Emerging Markets Investor
Any investor who knows anything at all about China knows something about Baidu (BIDU). This is the Chinese language search engine company founded by Robin Li in 2000 that still
dominates online search in China with a 55% market share.
Baidu soundly beat Google in head-to-head competition for dominance in Chinese search, a result that (along with censorship requirements imposed by the government) caused Google to abandon the Chinese search business for years.
Baidu also overcame a stiff challenge from Qihoo 360 started in August 2012, when the upstart company stopped using Baidu as the default search engine on its popular mobile Web browser. Baidu was caught flatfooted by the speed of the shift to mobile devices as the primary means of accessing the Web, and it took more than a year for the company to shift its focus and regain its momentum.
But throughout its history, Baidu has never stopped growing. Using the same revenue strategy as Google—auctioning keywords to advertisers—the company has a long history of growth.
We first featured Baidu in Cabot Emerging Markets Investor in October 2006, when Internet penetration in China was just 9.4%. With penetration up to 48.8% (as of June 2015), the market is as massive as any in the world. Monthly active users of Baidu Mobile search reached 643 million monthly active users in Q3 and mobile now accounts for nearly two-thirds of the company’s search traffic.
Baidu is now engaged in a titanic struggle with China’s other online giants, Alibaba and Tencent Holdings. Each company has its own base—search for Baidu, online sales for Alibaba and messaging for Tencent—but each is also using its enormous cash flow to expand into new areas of the Internet. Baidu’s purchase of a popular app store was the opening move in its campaign to catch up with the move to mobile devices.
And since 2011, Baidu has invested more than $5 billion into offline services like home delivery and education loans. The company has also bought Nuomi Holdings (discounts, restaurant bookings and movie services) and Edaixi (an Uber-style laundry pickup app). This battle will continue, with Baidu’s $11.1 billion in total cash providing the ammunition.
BIDU was in our portfolio in 2006, 2009, 2012 and 2013, which makes it a known and reliable choice; we’ve pulled big profits out of it overall. The stock has been through a long, hard correction, falling from 252 in November 2014 to as low as 100 during the August 24 panic selling. The stock recovered almost immediately to above 150, then dropped to 132 during the September retest of the August lows.
BIDU started a powerful rally in late September cruising past its 25- and 50-day moving averages in mid-October and overtaking its 200-day line on Monday. The story has always been attractive, but it’s the rebound in momentum that’s pulling us back into BIDU. With good volume spikes on October 26 and 30, the latter reflecting a good reaction to the company’s estimate-beating quarterly report on October 29, all the elements are in place for BIDU to perform well. BUY.
Paul Goodwin, Cabot Emerging Markets Investor, www.cabot.net, 978-745-5532, November 5, 2015