Is Baidu, the “Chinese Google,” a finished stock? Exploring its reality and investment opportunities
Analysis of Chinese stocks after a long time.
Looking at stock prices by country,Japan and China look undervalued compared to the overvalued United States, in our view. In terms of P/E, the United States is around 20x, while Japan and China are around 12x.
Of course, there are reasons for being overvalued or undervalued. For domestic economic growth, Japan cannot rival the United States.
However, China's growth rate surpasses that of the United States. In particular,the speed of China's IT adoption is formidable, and Alibaba and Tencent have become among the world's top 10 by market cap.
On the other hand,the remaining one of the once-lauded Chinese IT labels, Baidu, has underperformed. The gap with the two companies above has widened over time.
Is Baidu a stock that has already fizzled out? We analyze in detail.
Significant profit decline due to misconduct, but currently in recovery
Baidu is, in simple terms,China's Google. It provides a search engine and earns advertising revenue by displaying ads related to search terms.
Recently, it has also been heavily investing inthe video site iQIYI. This is basically the Chinese version of Netflix. In 2017, it signed a licensing agreement with the original Netflix.
Regarding performance,sales have been on a growth trajectory. Based on this, it doesn’t seem like a “dead” stock.
However,profits declined sharply from 2015 to 2016.
This was caused by a misconduct incident in 2016 where a hospital that had been an advertiser caused the death of a student. User criticism rose, andBaidu was forced to reform its search service.
After overcoming that incident, profits have recovered.Advertising revenue grows at an average annual rate of about 20%. This is about the same growth as Google itself.
Growth of iQIYI, the video site with 100 million paid members
However, even though revenue has increased, profits have not yet recovered to pre-scandal levels.The factor dragging it down is the video site iQIYI.
Its revenue model includes advertising like YouTube and paid subscriptions like Netflix, but in recent years it has focused more on the latter.
To distribute paid videos, you must first create or acquire content. The costs accumulate, andthe iQIYI business records a loss of about 8 billion yuan (around 120 billion yen), reducing profits from the search site and other areas by about 24 billion yuan.
Of course, it has grown that much as well.iQIYI's paid membership has surpassed 100 million. Netflix is 150 million, so it is quite solid. Indeed, China's population of 1.3 billion cannot be ignored.
【Reference】China’s Netflix “iQIYI” reaches 100 million paid members
Currently in the red, but with great future potential remaining.
Economic conditions affect it, but its position in China is solid
Despite previously facing a misconduct incident,the search engine market share in China is 70%. As the internet market in China expands, it is expected to grow steadily with such a high share as an advantage.
However, the first half of 2019 advertising revenue turned negative year over year. This is thought to be due to slowing the economy reducing ad spend.Advertising is sensitive to the economy, so Baidu is also a cyclical stock. Given the economic situation, the outlook for a while remains challenging. This is putting further downward pressure on the stock price.
That said, viewed from another angle,
if the economy recovers, earnings will grow significantly. If at that time iQIYI also becomes profitable, earnings could surge. In that case, its stock price is likely to rebound.
Undervalued yet with growth potential. When is a good time to buy?
Based on the above, investors should consider two points:
- Is the stock price currently undervalued?
- If undervalued, when is the right time to invest?
Is it undervalued right now?
According to Morningstar,the P/E is 16x. Considering Google (Alphabet) at around 25x, there is a sense of being reasonably undervalued.
Moreover, if iQIYI, which is currently in the red, has broken even, the sense of undervaluation grows stronger.It is not at least overvalued.
When should you buy?
If the Chinese economy slows down going forward, earnings will deteriorate. If earnings deteriorate, the stock price is likely to fall, sothere is no need to rush to buy now. It is not yet an extremely undervalued scenario.
Still, what gives this company potential isits lower valuation compared to Alibaba and Tencent. Also, the stable growth of a search site with a high market share in China is a simple and appealing story.
Growth of iQIYI with 100 million paid membersis also something to look forward to.
Therefore,in the generally undervalued Chinese stocks, if you want exposure to IT sector growth, considering it as part of the mix makes sense.
Of course, it can also be considered alongside the iron-clad Baidu and Tencent. At the very least,it is not as bad as some hype suggests.
We will continue to monitor. Please also read the following related articles.
