Background and Foundation of Baidu
It all started when the founder of the company Baidu, Robin Li started looking for algorithms for search engines during his work at the Down Jones. Finally, after two years of work, he was able to come up with the RankDex. It was not a search engine. It was more of a ranking engine which was used to rank pages. During the same period, Larry and Sergey also worked on the same search engine area, trying to develop a logarithm which would enable them to search keywords. These were the one which was then used by Google. Google had already been launched, when Robin was working on his search engine algorithms. However, he did not lose hope and left his job at the company Infoseek and went to China to establish his own business. He started working first as a paid search engine service in 1999. However, after working as a paid search engine for a year, they made it an independent search engine (Baidu Inc). From then onwards, the company has been gaining its market share now known as the “Google for China.”
The company is most famous for online marketing and has its most of the revenues collected from this sector. It has also made analysts and customers complain about it as well. The flood of advertisements that appear on the searched pages makes it difficult for the users to work. In 2005, Baidu went public and earned a return of 354% on its first day of trading. It is the second largest search engine in the world today. The company has been criticized for the censorship. It has also been criticized for the promotion of the illegal music downloads. The company is considered as the second largest search engine globally (Baidu Inc). The company has been trying to capture the global market as well but has been not much success yet. However, it knows the dynamics of the Chinese market and can be considered the market leader in the Chinese region. In looking at how profitable this company can be regarded investment in its stock. We need to thoroughly analyze and evaluate its performance in the past and its plans for the future. For this purpose, some models are going to be used to recommend the stock investment better (Standard & Poor Net Advantage).
Mergers and Acquisitions:
The company was incorporated in 2000 in the Cayman Islands. The company has conducted its business operations since its inception through the Baidu Online wholly owned subsidiary in China. The company was listed on NASDAQ in 2005 with the stock quote of Baidu. Currently, the company stocks are traded on the NASDAQ Global Select Market (Securities and Exchange Commission 43). The company changed its name from Baidu.cm to Baidu Inc in 2008. The company has gained the controlling interest in 2012 in iQIYI Inc, whose financial results are consolidated into the consolidated financial statements of the company. In 2013, the company acquired the business PPStream Inc the online video streaming business and merged with the iQIYI whose results are also consolidated in the financial results of the company. The online travel service provider company is also a part of the company whose results were consolidated in the past is not done from 2016 onwards. The company also gained a major stake in the Ctrip and became its major shareholder. The subsidiary of the company which helped in deliveries of Baidu, the Xiaodu Technology Ltd was merged with Rajax Holding. It has made the Xiaodu a subsidiary for Rajax. The company is cooperating with Rajax in various broader areas (Baidu Inc).
The vision of Baidu for Future:
The company has changed its vision statement too:
“Baidu aims to make a complex world simpler through technology.” (Securities and Exchange Commission)
The financial report shows that this will be done by focusing on the mobile foundation and in the artificial intelligence. It shows how the company is planning for its future and what areas it is targeting for future growth. The search engine service is going to be just one service in the future. The company is not only going global but also targeting the hot new markets for expansion (Securities and Exchange Commission 44). These show the opportunities which are being tapped by Baidu and show the potential of a rise in the market price of Baidu stock because of its high aspirations and commitment for plans.
Products of Baidu:
The annual financial report of the company Baidu has been analyzed for looking at its reported business operations and its performance. The company has reported itself as the leading Chinese language internet search engine. The company shows its commitment to work in areas of mobile technology and artificial intelligence through changing the vision statement.
The business currently operates in two segments: the Baidu Core and the iQIYI. The keyword-based online marketing service, which is triggered and targeted by the online user’s search inquiries, is included in the Baidu Core segment. These include the online marketing service, the P4P service, and the Artificial Intelligence-enabled new initiatives. On the other hand, the other segment of Baidu, the iQIYI is market leading innovative online entertainment service provider based in China. The platform of the iQIYI features not only the comprehensive, professionally produced or partner generated selection of content, but also highly genuine original popular content (Baidu Inc).
The website of the company Baidu.com is reported as the largest website in China regarding the average daily visitors and the number of page views in last three-month period. It is also the second largest website as per these metrics as well. The company brand “Baidu” is considered as one of the highest ranked brands of China. The company is majorly based in China and has more than 97% of its total revenue collected from the China market segment.
The product portfolio, as per the 10K report of the Baidu Inc includes
| Baidu App
Baidu Search Baidu Feed Bear Paw Account Baijiahao Baidu Post Bar Autonomous Driving |
Baidu Mobile Assistant
Baidu Guardian DuerOS Baidu Wallet Baidu Customer Credit |
Baidu Cloud Drive
Global Business P4P BrandZone Baidu Wealth Management Baidu Maps |
Haokan Videos
Baidu Knows Baidu Encyclopedia Baidu Education Online Marketing Services iQIYI |
(Securities and Exchange Commission)
The company provides different Internet-based services like the web browsing service, the cloud storage service, and the online advertising service.
The company is going to introduce the Phoenix Nest for improving its online advertising system and reducing the concerns for the flood of advertisements by adopting the Google display strategy. The company has shown its interest in the Artificial Intelligence of which one initiative is the entrance into the development of the self-driving cars. Analysts are considering the recent launch of the Apollo 2.0 that is the newest version of the self-driving software as better and improved. It is even being considered to beat Google by its adaptation of the Android Operating system. Baidu could dominate in this segment in the Chinese market if it succeeded. It is expected to translate into a rise in the stock price of Baidu in future as well (Securities and Exchange Commission).
Research and Technology of Baidu:
The company has five research labs under the main Research Institute of Baidu Research. These include the Silicon Valley artificial intelligence lab, the Institute of deep learning, the Robotics, and autonomous driving lab and the business intelligence lab (Securities and Exchange Commission 51). The plans and direction of the company can be deduced through witnessing the research investment in this field. The company is more focused on Data Analytics, Artificial Intelligence, and Robotics for the future. The Technology developed by the company includes the following:
| Link Analysts
Ranking Information Extraction Web Crawling Natural Language Processing Mobile Instant Pages Lavas Indexing Technology |
P4P Auction System
Phoenix Nest Metric Retrieval Technology P4P Billing system P4P Customer Service System Pro theme contextual Promotional Technology |
ROI-Constraint Auto-Targeting Technology
URL-Targeting Technology Large Scale Cluster Management Storage Distributed Computing System |
(Securities and Exchange Commission 54)
Baidu Debt Summary:
Analysts evaluate the credit ratings of a company thoroughly to analyze the credit paying abilities of the company. It is certainly crucial to look at these figures. The following table shows the credit and debt summary for Baidu Inc as of March 2018. The company has about 12.7% of revolving credit of its total Debt. More than 80% of the debt is in the form of senior bonds and notes. The company has about USD 8061 Million of debt outstanding. It is a huge amount; however, it is not unusual for companies to have such huge debts. However, it is better to invest in a company which has lower Debt to Equity Ratio (Standard & Poor Net Advantage).
Table 1: Debt Summary
| Millions | % of Total | |
| Total Revolving Credit | 1020.196704 | 12.7% |
| Total Term Loans | 190.6492591 | 2.4% |
| Total Senior Bonds and Notes | 7204.629124 | 89.4% |
| Total Principal Due | 8415.475087 | 104.4% |
| Total Adjustments | -353.8 | (4.4%) |
| Total Debt Outstanding | 8061.626236 | – |
| Total Secured Debt | 47.66231477 | 0.6% |
| Total Unsecured Debt | 8367.812772 | 103.8% |
| *Mar-31-2018, in USD |
The total debt to equity ratio for the company is 36%. It shows that the company has the debt-to-equity ratio of less than 1, which is a good sign. The total liabilities of the company account for about 48% of the total assets. It indicates that 52% of the assets are sourced from the equity financing, whereas 48% of the assets are sourced from the debt financing (Finance.Yahoo).
Table 2: Debt Ratios
| Total Debt/Equity | 36.5% |
| Total Debt/Capital | 26.7% |
| LT Debt/Equity | 31.7% |
| LT Debt/Capital | 23.2% |
| Total Liabilities/Total Assets | 48.5% |
| EBIT / Interest Exp. | 11.1x |
| EBITDA / Interest Exp. | 18.4x |
| *Mar-31-2018 |
The EBIT/ Interest Expense is the ratio which shows the operational efficiency of the company regarding paying off its debt liability. The company has 11 times more ability to pay off its interest expense as compared to its interest liability. It shows the strong financial health of the company. It is a strong indicator of stock investment in this company (Yahoo Finance).
Financial Analysis of Baidu:
The financial analysis of the company regarding its operating efficiency, profitability, and returns is summarized below.
Table 3: Profitability Ratios
| For the Fiscal Period Ending | 12 months Dec-31-2013A |
12 months Dec-31-2014A |
12 months Dec-31-2015A |
12 months Dec-31-2016A |
12 months Dec-31-2017A |
LTM² 12 months Mar-31-2018A |
| Currency | USD | USD | USD | USD | USD | USD |
| Total Revenue | 5,017.6 | 7,704.9 | 10,426.9 | 11,081.5 | 13,321.3 | 13,952.2 |
| Growth Over Prior Year | 43.2% | 53.6% | 35.3% | 6.3% | 20.2% | 24.0% |
| Gross Profit | 3,581.6 | 5,303.6 | 6,843.4 | 6,281.1 | 7,528.3 | 8,053.8 |
| Margin % | 71.4% | 68.8% | 65.6% | 56.7% | 56.5% | 57.7% |
| EBITDA | 2,169.5 | 2,630.7 | 2,751.9 | 2,885.3 | 4,308.7 | 4,752.9 |
| Margin % | 43.2% | 34.1% | 26.4% | 26.0% | 32.3% | 34.1% |
| EBIT | 1,757.9 | 2,011.1 | 1,833.4 | 1,578.4 | 2,464.7 | 2,867.1 |
| Margin % | 35.0% | 26.1% | 17.6% | 14.2% | 18.5% | 20.5% |
| Earnings from Cont. Ops. | 1,631.7 | 1,924.7 | 5,094.2 | 1,821.4 | 2,872.6 | 3,465.9 |
| Margin % | 32.5% | 25.0% | 48.9% | 16.4% | 21.6% | 24.8% |
| Net Income | 1,657.2 | 2,072.9 | 5,287.8 | 1,827.1 | 2,874.6 | 3,647.0 |
| Margin % | 33.0% | 26.9% | 50.7% | 16.5% | 21.6% | 26.1% |
| Diluted EPS Excl. Extra Items³ | 4.72 | 5.87 | 14.95 | 5.0 | 8.23 | 10.44 |
| Growth Over Prior Year | 0.7% | 24.4% | 154.8% | (66.5%) | 64.5% | 113.7% |
The Key Financials of the company shows that the company Growth as compared to the previous year has declined in the last five years from 43% to 24%. The margin of the company has remained substantially from 43% to 34% and not declined. The margin of the Net Income has declined as well. The company has depreciated its net income margin from 33% to 26% from 2013 to 2018 first quarter. The Diluted EPS has, however increased from 0.7% to 113%. It shows the real value that the stocks have gained in the last few years.
The Earnings per Share is considered as an important indicator that can be used for the valuation of the company. It shows the portion of the income the investor is earning on its shares. The earnings per share as reported by the year 2017 show that the company has crossed the expectations of the analysts for all last four quarters.
Figure 1: EPS 2017
For the whole year, the company Baidu’s actual earnings per share have been higher than the analysts’ expected earnings per share. The following table depicts the figures of the earnings per share for the last four quarters of 2017.
Table 4: EPS
|
Earning for 2017quarters |
|
| Estimated | Actual |
| $0.96 | $1.08 |
| $1.61 | $2.52 |
| $2.14 | $4.09 |
| $2.10 | $2.49 |
(Morningstar.Com)
The comparison of the actual earnings per share and the estimated earnings per share as depicted in the graph shows that the reported higher earnings are constant for all four quarters. The difference in the expected and reported earnings per share is lower in the first quarter. The major difference in the actual and expected EPS can be witnessed in the third quarter because of the higher net income reported by the company in this quarter.
Chart 1: EPS 2017 Comparison
Financial Ratio Analysis of Baidu:
The financial ratio analysis of the company Baidu Inc is important to evaluate its financial performance. The profitability ratio of the company shows that Baidu is performing comparatively well in its first quarter of 2018 as compared to 2017. The company ROA has been highest in the year 2013 at 12%. It has been declining and has reached 4% in 2018 due to the increase in the value of the assets. It shows that even with the increase in the assets of the company, it has not been able to utilize it efficiently. The Return on Equity has been declining as well. However, it has regained its position in 2017 and 2018 (Finance.Yahoo ).
The gross margin of the company has declined. However, it is still at 56%, which is quite promising. The Net income margin has declined as well, but the decline is not very much highlighted. The 26% of net income margin is a good income margin. The company Asset turnover has declined from 0.5 times to 0.4 times. The company Free Cash Flow margin of 31% in 2017 is also another healthy figure. The company had a quick ratio of 1.4 times in 2018 which has declined from 3.4 times in 2013 showing the use of the current assets in its many investments.
Table 5: Financial Ratios
| For the Fiscal Period Ending | 12 months Dec-31-2013 |
12 months Dec-31-2014 |
12 months Dec-31-2015 |
12 months Dec-31-2016 |
12 months Dec-31-2017 |
LTM 12 months Mar-31-2018 |
| Profitability | ||||||
| Return on Assets % | 12.0% | 9.4% | 5.9% | 3.8% | 4.5% | 4.8% |
| Return on Capital % | 14.4% | 11.6% | 7.3% | 4.8% | 6.2% | 6.7% |
| Return on Equity % | 30.6% | 25.9% | 46.9% | 12.7% | 16.0% | 18.5% |
| Return on Common Equity % | 32.6% | 29.4% | 50.8% | 12.8% | 17.6% | 21.3% |
| Margin Analysis | ||||||
| Gross Margin % | 71.4% | 68.8% | 65.6% | 56.7% | 56.5% | 57.7% |
| SG&A Margin % | 16.2% | 21.2% | 25.7% | 21.4% | 15.5% | 15.1% |
| EBITDA Margin % | 43.2% | 34.1% | 26.4% | 26.0% | 32.3% | 34.1% |
| EBITA Margin % | 37.9% | 29.6% | 22.0% | 21.1% | 27.9% | 20.5% |
| EBIT Margin % | 35.0% | 26.1% | 17.6% | 14.2% | 18.5% | 20.5% |
| Earnings from Cont. Ops Margin % | 32.5% | 25.0% | 48.9% | 16.4% | 21.6% | 24.8% |
| Net Income Margin % | 33.0% | 26.9% | 50.7% | 16.5% | 21.6% | 26.1% |
| Net Income Avail. for Common Margin % | 32.9% | 26.8% | 50.2% | 15.7% | 21.6% | 26.2% |
| Normalized Net Income Margin % | 24.4% | 20.4% | 14.5% | 10.0% | 11.6% | 15.5% |
| Levered Free Cash Flow Margin % | 26.3% | 22.1% | 15.7% | 23.7% | 29.9% | NA |
| Unlevered Free Cash Flow Margin % | 27.2% | 22.9% | 16.7% | 24.7% | 31.1% | NA |
| Asset Turnover | ||||||
| Total Asset Turnover | 0.5x | 0.6x | 0.5x | 0.4x | 0.4x | 0.4x |
| Fixed Asset Turnover | 6.9x | 7.0x | 6.9x | 6.4x | 7.1x | 7.2x |
| Accounts Receivable Turnover | 18.3x | 16.5x | 16.7x | 15.3x | 15.9x | 16.8x |
| Inventory Turnover | NA | NA | NA | NA | NA | NA |
| Short-Term Liquidity | ||||||
| Current Ratio | 3.9x | 3.2x | 3.0x | 2.2x | 1.8x | 2.0x |
| Quick Ratio | 3.7x | 3.0x | 2.8x | 2.1x | 1.5x | 1.4x |
| Cash from Ops. to Curr. Liab. | 1.3x | 0.9x | 0.8x | 0.5x | 0.4x | NA |
| Avg. Days Sales Out. | 19.9 | 22.1 | 21.8 | 24.0 | 22.9 | 21.7 |
| Avg. Days Inventory Out. | NA | NA | NA | NA | NA | NA |
| Avg. Days Payable Out. | 15.1 | 13.4 | 13.3 | 19.4 | 22.2 | 239.9 |
Future Outlook of Baidu
Firm Value of Baidu
The following shown graph depicts the performance of the stock for the Baidu Inc of its last two years. The company stock performance has been following an uptrend in the last two years as evident from the graph. The 210 is the roof of the last year, which the company Baidu Inc has crossed in the year 2017. The investors like to buy or hold the stock if the stock price remains above the mentioned roof lines (Media Corporate).
Figure 2: Baidu Stock Performance
CAPM and DCF Model of Baidu:
Valuation of the company is done to predict the future stock value of a firm. We are going to use it for analyzing the prospect of investing in this stock and earning a profit. The CAPM model is used for the estimation of the cost of equity of Baidu Company. The equation used for this purpose is.
Ke = Rf+βx(Rm-Rf)
This equation is used to find the future stock price for Baidu. The assumptions for the computation of the cost of equity include.
- The Annualized Average return from 1988 to 2018 of the S&P 500 Index is considered as the market rate of return.
- The IRX rate is assumed to be equal to the 13-week Treasury bill rate that is the risk-free rate of return.
- The Beta value indicates the risk factor of the stock of Baidu that has been collected from the Yahoo Finance.
- The Money Chimp website platform is utilized for the computation of the Expected share value by utilizing the Discounted Cash Flow Method.
- The Earnings per Share/EPS value is taken from the Morningstar website of the last Trailing Twelve Months.
- The 5-year growth rate of the EPS as mentioned in the Morningstar is considered for the earnings per share growth rate for coming five years.
- The Earnings per share growth rate for the years after these mentioned five years is considered at a lower 5% rate.
- The Chinese Yuan to USD foreign exchange rate on the day 9 May 2018 of 0.16 has been utilized for the conversion of the Earnings per Share.
Table 6: DCF Computations
| S&P 500 Index | Rm | 12% |
| IRX | Rf | 2.34% |
| Beta | Β | 1.96 |
| Cost of Equity | Ke | 20.77% |
| EPS | Trailing Twelve Months TTM | $ 10.63 |
| EPS Growth Rate | Lst 5YR Gr Rt | 12% |
| EPS Growth Rate | Assumed | 5% |
| Share Price | DCF | $ 101.00 |
| Current Share Price | ($) | $ 263.09 |
| USD to Yuan Rate | 1 Yuan = | 0.16 USD |
(Finance.Yahoo )
Table 7: EPS 2013-2017
| Diluted Earnings Per Share | ||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | YTD | TTM | 5-Yr Avg | 5-Yr Growth |
| ¥ 30.02 | ¥ 37.34 | ¥ 95.15 | ¥ 31.86 | ¥ 52.41 | ¥ 18.68 | ¥ 66.46 | ¥ 48.74 | 0.12 |
| $ 4.80 | $ 5.97 | $ 15.22 | $ 5.10 | $ 8.39 | $ 2.99 | $ 10.63 | $ 7.80 | |
(Finance Yahoo)
The appendix shows the glimpse of the Money Chimp workings of the DCF stock value. The share value as per the computations shows that the $101 is lower than the current share price of $263.09 showing that the market price of Baidu is overvalued.
Limitations of this Model:
There are certain limitations of this model as well. For instance, the DCF model is super sensitive to the forecasts and assumptions made by the analysts. The slight changes made in their valuations cause drastic changes in the fair value estimates showing that these estimates might be misleading in some instances. The DCF model is also comparatively more time-intensive in nature. The forecasting is always difficult, as one cannot consider the very dimensions of the factors involved in yielding a return for a company. It is more difficult for companies who are not 100% transparent. Furthermore, the EPS value is considered in this valuation. The EPS of Baidu is shown to have constantly changed every year. The changing nature of Baidu EPS also makes the model highly unpredictable.
Stock Analysis of Baidu:
The most widely trusted and accepted recommendations are that of the private research firm, CFRA Research. We are going to utilize the research report of this firm for the stock recommendation of Baidu.
Competitive Landscape of Baidu:
Analysts have long considered China as a dynamic economy with its record of a sustained level of growth and the ability to provide a future of sustainable growth as well. The country has the largest number of internet users that is more than any other country, and the broadband penetration is increasing rapidly. The company Baidu, as of January 2018 has about 64% of the search engine market share to its name. Shenma is the leading competitor with 21% of the market share, with Haosou having 6% market share, Sogou having 5% of the market share, and Google and Bing having 2% and 1% of the Chinese search engine market share respectively (Statista.Com).
Google had announced in 2010 that it would stop its operations in search engine market of China. It was due to the continuous cyber-attacks and the censorship that it faced in the last few years. The company was discontinuing the Google China and offering the users to use the Google Hong Kong domain instead. The analysts believe that other than the current participants of the search engine market, there is the potential of new entrants as well. The analysts consider the internet giant in China, the Ali Baba group who is the global leader in e-commerce and the global leader of messaging and gaming, Tencent Holdings as a potential new entrant in the search engine market. Both have quite strong franchises and are also on the lookout for opportunities in this market segment.
Still, the belief of the analysts is strong for Baidu. The knowledge and experience that Baidu holds in the Chinese search engine market cannot be matched with any other company. The early market lead and the respect and goodwill associated with Baidu brand are evidently enough to sustain its market share in this segment. The analysts consider the experience of the Chinese online search and online marketing as the competitive advantages for Baidu.
Financial Trend of Baidu:
The company Baidu revenues have increased from around $2.8 billion in 2012 to around $13 billion in 2017. The company’s net income in the same period has increased to $2.8 Billion from $1.7 Billion. As mentioned earlier, the company has been actively participating in mergers and acquisitions during this period and has made substantial investments.
Partly, as a result of the IPO completed in 2005, the company has about $18 Billion of cash and investments in 2017. The company Baidu acquired in 2013 the third-party app store 91 Wireless Web soft for a transaction amount of $1.9 billion. It has issued a substantial amount of debt in the past years. The company has about $6.7 Billion in debt at the end of 2017 (Capitaliq 2).
Key Stock Statistics of Baidu:
The company Baidu Inc who is operating in the GICS Sector of Information Technology and the sub-industry segment of Internet Software and Services was trading at $ 263 on9th May 2018. The price of the stock on 4 May 2018 was at $ 251.73. The company has gained value by 9.19 points in a day and by 3.6% in 1 day (Morningstar.Com). The 52-week range of the company shows a return of -37%. The value of the stock has been declining in the last year. The Trailing 12-month EPS of the company is CHY 66.4, and the Price per earnings ratio is 3.80. The growth rate for the EPS for the next three years is expected to be 19%. The $10 K invested ten years ago is shown to have a value of $29,787. It means that the 10K invested in 10 years would have gained about 198% of return in 10 years. However, it should be noted that the stock of Baidu has seen an expanded variability in its stock price during this period (Securities and Exchange Commission).
Table 8: Statistics of Stock
| 52-Wk Range | $274.97 – 173.52 | Oper. EPS 2018E | 10.62 | Market Capitalization(B) | $87.79 | Beta | 1.88 |
| Trailing 12-Month EPS | 66.44 | Oper. EPS 2019E | 11.91 | $10K Invested 5 Yrs Ago | $29,787 | 3-Yr Proj. EPS CAGR (%) | 19 |
| Trailing 12-Month P/E | 3.8 | P/E on Oper. EPS 2018E | 2 3.77 | Institutional Ownership (%) | 65 | Common Shares Outstg.(M) | 348.73 |
The Beta of the company is 1.88 as per the research conducted on the Baidu Company. This beta of 1.88 shows the highly aggressive nature of this investment. The beta value of more than 1 shows that there is high variability expected at the stock price. The beta value of Baidu is quite higher than 1 showing its high variation in the stock returns. However, the trend is upward for long-term investment. It is also depicted in the annual returns of the company Baidu collected and shown below.
Chart 2: Baidu Monthly Stock Prices 2005-2018
The graph shows how many variables the stock prices are in each year from 2005 to 2018. Specifically, in the last five years, the returns have been facing quite variations.
Quantitative Evaluations of Baidu
The CFRA proprietary model ranks stocks as the most overvalued as 1 and the most undervalued as 5. The Fair value rank of the stock of Baidu is ranked at 4 shown in the figure below. It shows that as per the analysts the share of Baidu has been slightly undervalued by the market. This undervaluation means that the stock price is expected to rise in future. The slight undervaluation is considered to be by 2.3% of $5.67 points for Baidu Stock. The stock of the company is considered as an average volatile stock with its average variation in price (Capitaliq).
Figure 3: Quantitative Evaluation by Analysts
Sub-Industry Outlook of Baidu:
The industry of the Internet Software and Services is analyzed and considered by the analysts and research firms to be positive. This positive outlook is considered by taking into account the increased percentage of budgets that are committed to this industry. The internet online offers have increasingly shown improvements in pricing which has seen an offset, by the European uncertainty of economic activities created by the BREXIT voting. Analysts have positive hopes for mobile advertising and video sectors.
The US online marketing revenues have increased in 2016 by 22%, and analysts are considering it to rise by 23% in 2017 and 20% in 2018. The increased time spent by consumers on online forums has led the companies to spend more of their advertising budgets on the digital forums. The mobile marketing and internet marketing is providing a better return on investments as compared to traditional media. The mobile has increased volumes; like in the US, it drove half of the digital advertising sales (Statista.Com).
The growing rise of the technology adaptation is also considered a positive sign for the interactive advertising. The internet has enabled tablets, and smartphones have raised the opportunities for online advertising. Furthermore, the video offerings in the form of Facebook live and on other social media platforms also provide great opportunities for the industry.
As per the Department of Commerce, the online retail sales in the US grew by 15% and 18% in 2016 and 2017 respectively. There is an opportunity for growth in the mid-teen levels expected to be translated in 2018 and 2019. The factors which can be attributed to the high attraction of the online retail sales includes the 24/7/365 access to the store, the substantial selection of the goods, the home delivery convenience, and the attractive value proposition (Capitaliq).
As per another research company, Forrester Research, the improved initiatives across the multiple channels, the improved merchandising, the improved offerings for customers, the customization ease, the marketing efforts and access to physical and online stores has led to the segment growth.
Industry Performance- Internet Software & Services
Figure 4: Industry Performance
The Internet Software and Service industry segment is reported to decline by 3.9% as compared to the 1.2% overall decline in the S&P 500 Index in March 2018. Similarly, the Industry Segment of the index reported rise by 40% in 2017 and 5% in 2017 as compared to the S&P increase of 18% and 10%. It is shown in the graph above. It indicates that the internet software and services market segment is more sensitive to the changes as compared to the S&P 500 Index (Capitaliq).
Peer Group Analysis of Baidu:
The following chart shows the Peer Group Analysis of Baidu Inc with its industry participants of Internet Software & Services. The stock price comparison of the highest Price per earnings ratio is for the Welbo Corporation at 74 times. The second highest price earnings ratio is shown for Akamai Technologies at 63. Baidu Inc has a price per earnings ratio of 25. It shows that the investors are willing to pay 25 times more price for the stock of Baidu as compared to its earnings. The company has reported about a 42 % change in price which is among the highest in its peers. Baidu has the highest Stock Market Capitalization of $87,786 Million. The stock price of Baidu Inc is also among the highest in its peers (Capitaliq).
Table 9: Peer Group Analysis
| Peer Group Price Comparison | ||||||||||
| Peer Group | Sym | Recent Stock Price | Stk Mkt Cap(M) | 30-day price Chng (%) | 1-Yr Price Chng (%) | P/E Ratio | Fair Value Calc | Yield % | ROE | LTD to Cap % |
| Baidu Inc | BIDU | 252 | 87,786 | 12 | 43 | 25 | 257 | Nil | 16 | 21 |
| Akamai | AKAM | 72 | 12,282 | 2 | 36 | 63 | 50 | Nil | 7 | 17 |
| Altaba | AABA | 73 | 58,887 | 5 | 50 | 2 | NA | Nil | 47 | 2 |
| MercadoLibre, | MELI | 330 | 14,571 | (7) | 40 | NM | NA | Nil | 4 | 45 |
| NetEase, | NTES | 252 | 33,038 | (9) | (5) | 21 | 267 | 2 | 25 | NA |
| Shopify | SHOP | 136 | 14,389 | 13 | 67 | NM | NA | Nil | (6) | NA |
| Spotify | S.A. | 154 | 27,481 | 7 | NM | NM | NA | Nil | NM | 80 |
| Twitter, | TWTR | 31 | 23,276 | 10 | 68 | NM | 18 | Nil | (2) | 24 |
| WB | 115 | 25,674 | (1) | 108 | 74 | 122 | Nil | 36 | 42 | |
| Yahoo | YAHO | 7 | 20,300 | (22) | (14) | 17 | NA | 2 | 14 | 6 |
| eBay | EBAY | 38 | 37,771 | (5) | 13 | NM | NA | Nil | (11) | 51 |
Analyst’s evaluation:
The following graph shows the comprehensive summary of the analyst’s recommendations for selling, buying, or holding the Baidu Stock. The summary shows that out of total 34 analysts, 18 have voted for buying the stock, 5 have recommended for buying or holding the stock and 10 have recommended holding the stock. Only one analyst has recommended to weak hold the stock which represents only 3% of the total recommendations. Thus, the recommendation as per the analysts of the CFRA research firm is for strong Buy and Hold the stock.
(Capitaliq)
Investment Rationale/Risk
The analysts are considering having a Hold recommendation on the Baidu stock. It is because of the reason that analysts consider it as a clear leader of the Chinese search engine segment. However, the company has considerably lost its market share to the competitors in the last few years. The market share if Baidu is however still stabilized. Because of the potential of growth in the mobile segment, which accounts for more than 70% of the revenue of Baidu and the artificial intelligence growth potential, the company is considered a prime prospect for future growth. The company Baidu is spending most of its resources in the form of research and investment in these two sectors primarily. Thus, this constitutes the competitive advantage of the company as well. The current IPO for the iQIYI and the divestiture of the Du Xiaoman are also considered by the analysts.
The Risks provide competitive challenges in the form of margin pressures regarding pricing and investments. The challenge of execution of the growth plans and the high regulating bodies of China can be a risk factor. The issues related to the company corporate governance and the implementation of its growth plans are major concerns.
Figure 5: Analysts Risk Assessment
The analysts of the CFRA have targeted a price of $247 for the next twelve months. The peer group of the global internet leaders for the company has had a forward median Price per Earnings ratio of 24.4 times and the Price per Earnings to Growth Ratio of 1.1. It shows the high growth potential of this industry sector. The CFRA research has used these multiples and found the target price as a resultant. The company strengthening of the balance sheet and the IPO of the iQIYI and the divestiture of the Xiaoman has led to this conclusion.
Wall Street Consensus Estimates
The Wall Street Consensus estimate has been reported as that of Buy/Hold regarding the Baidu stock. The analyst’s estimates of the Wall Street Consensus for the financial year 2018 showed earnings per share of $10.63 out of which BAIDU has earned $2.94 in its first quarter 2018. The analysts on Wall Street have estimated the rise in the earnings per share of Baidu to grow in 2019 by 17% to $ 12.42 (Wall Street Journal).
Stock Recommendation for Baidu:
As per the analysis conducted on the stock of Baidu Inc, it can be said that the stock recommendation would be to “Buy/Hold” the stock. It is based on the strong financial position of the company as depicted in the financial ratio analysis. The DCF model was used to value the stock price of the company which shows that the stock is overvalued. However, because of the limitations of the DCF model, we can consider it misleading. The analysis conducted by the Wall Street Consensus and the CFRA Research Institute shows that the stock has a strong “Buy/Hold” recommendation. The reasons behind this can be the priority investment of company in mobile technology and artificial intelligence; the industry segments which are expected to show strong growth in future years. Furthermore, the company owns the competitive advantage of being the market leader in Chinese search market and has the potential to retain its more than 60% market share. There are some competitive threats to the company as well because of its average volatile nature of stock price, and a beta of 1.88. However, despite these threats, it is expected to grow its worth through entrance in the artificial intelligence and retaining of the search market share.
Work Cited
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Morningstar.Com. “Baidu.” Morning Star. Morning Star, 6 April 2018. Web. 8 May 2018. http://www.morningstar.com/stocks/xnas/bidu/quote.html.
Securities and Exchange Commission. “Baidu Inc 10K 2017.” Securities and Exchange Commission. Securities and Exchange Commission. 2018. Web. 8 May 2018. http://media.corporate-ir.net/media_files/IROL/18/188488/2018/Baidu%202017%20Form%2020-F.pdf.
Standard & Poor Net Advantage. “S&P Global Market Intelligence.” Capital IQ. Capital IQ, 2018. Web. 8 May 2018. https://www-capitaliq-com.rlib.pace.edu/CIQDotNet/company.aspx?companyId=428613.
Statista.Com. “Worldwide desktop market share of leading search engines from January 2010 to October 2017.” Statista. Statista, 2018. Web. 8 May 2018. https://www.statista.com/statistics/216573/worldwide-market-share-of-search-engines/.
Wall Street Journal. “Baidu Inc. ADR.” The Wall Street Journal. The Wall Street Journal, 9 May 2018. Web. 9 May 2018. https://quotes.wsj.com/BIDU/research-ratings.
Yahoo Finance. “13 Week Treasury Bill Rate.” Yahoo. Yahoo, 2018. Web. 8 May 2018. https://finance.yahoo.com/quote/%5EIRX?p=^IRX.
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