Industry Description
The company that is going to be analyzed regarding the stock investment is Baidu Inc. Baidu Inc resides in the industry of Internet Software and Services and is considered as the “Google of China.” The company was founded by Robin Li who even after the establishment of Google went to China and started his company Baidu. From then onwards Baidu is the main industry leader in China and one of the competitors globally. The company is known for its presence in China but has now invested majorly in making acquisitions, which can establish it globally as well. All the companies who provide search engine and software services are participants in this industry including Google, Yahoo Bing, Alibaba, Weibo, eBay, Spotify and Twitter(Baidu Inc, 2018).
Industry Outlook
The industry segment of Software and Service industry is found to have declined by 4% in 2018 as compared to the 1.2% decline reported in the S&P 500 Index. The industry segment reported its rise, on the other hand, by approximately 40% in 2017 and by 6% in 2016 compared to the 18% and 10% increase of the index. It shows that the industry is highly sensitive to the changes as compared to the market.
The industry outlook is considered to be positive by analysts as there has been evidence of major investments made in this sector. The increased commitment of budgets in this sector shows the bright future for this industry. The online industry services have seen increased improvements even with the offset by the BREXIT voting causing uncertainty. The analysts are hoping for positive growth in the mobile advertising and video segments.
With the increased spending of time of consumers on mobile, the mobile advertising market is expected to grow. Furthermore, the mobile advertising and internet marketing are providing better returns to the investors as compared to the other mediums. The growing adaptation of technology is another supporting factor (CFRA Equity Research, 2018).
As per Forrester Research, the encouraging initiatives taken across the various channels aiding in the improvement of merchandising, offerings for customers, customizations, access to stores both physical and online and marketing efforts have led to the growth in the segment.
Baidu Inc. position in the industry
China has been long considered as a dynamic economy with the record of sustained growth and its ability to retain its position of growth even when the whole world is tumbling financially. The market provides the largest number of internet users, and the penetration of broadband is rapidly increasing. Baidu, as of 2018 January, holds 64% of the search engine market of China. Shenma is the second-ranked competitor with 21% of the market share to its name. Haosou, Sogou, Google, and Bing hold 6%, 5%, 2% and 1% of the market share respectively(Statista.com, 2018).
Google has however stopped its operations in China because of the constant cyber attacks and censorship. The giant Alibaba Group can be a threat to the company as it has the potential to enter this market even when it is looking to enter a new domain. Similarly, Tencent Holdings can be another threat. However, the analysts have a strong belief on Baidu. The experience of the Chinese market that Baidu holds provides it with the edge that is unmatched(Standard & Poor Net Advantage, 2018).
Ratio analysis of Baidu
The ratio analysis of the company is conducted to evaluate its financial performance and position. The revenue of the company has increased significantly in 2017. The following graph shows the ten-year ratio analysis for the company. The Gross profit of the company has increased in 2017 if compared to the year 2016. The company spends more on the research expense and lower on the general expenses in the year 2017.
(Morningstar.com, 2018)
The Return on Assets of the company has improved by 1% in 2017. The Return on Equity of the company has, however increased significantly in 2017. The Return on total invested capital is also seen to increase by 3%. It shows that the return on the capital invested, whether debt, equity has improved in 2017.
(Baidu Inc, 2017)
The operating performance of the company can be assessed by the ratios shown in the above graph. The operating margin has increased in 2017. However, the gross margin can be seen as declining in 2017. The net income margin for Baidu has been at 22%, which is a 16% increment as compared to 2016.
Valuation of Baidu
For the valuation of the company stock, the discounted cash flow method has been employed. For this, the money chimp calculator has been used. The model used the earnings per share which were taken from Morningstar. The earnings per share were in Yuan which is converted in USD at the day rate. The share price of the company Baidu was $263.
| DCF Model | ||
| Ke = Rf+βx(Rm-Rf) | ||
| Data | ||
| Current Share Price | ($) | $ 240 |
| USD to Yuan Rate | 1 Yuan = | 0.16 USD |
For the valuation the values of the equation have been assumed to be equal to;
| 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 |
(Yahoo Finance, 2018) (Baidu Inc, 2018)
Putting all the values in the money chimp calculator showed the DCF share value of $101. The screenshot has been attached in the appendix. The price comparison shows that the company is overvalued. However, it should be noted that the DCF model has many limitations and thus it can be misleading.
P/E ratio of Baidu
The Price to Earnings per Ratio shows how much price the investors or market is willing to pay for a share that is earning a said amount.
| Share Price | $ 263.09 |
| EPS-2018 | $ 66.46 |
| Price/EPS (2018) | 3.6 |
Looking at the graph above, it can be said that the market is willing to pay about 3.6 times more of the price for Baidu Share as compared to its earnings.
Growth Potential: Baidu Inc.
One would think why the market is willing to pay such highly for such little earning stock. The reason behind this overvaluation is the high investment that the company is making in the areas which are deemed to be highly competitive and profitable in the future. These include the investment in Robotics, Artificial Intelligence, and Business Intelligence. The vision of Baidu shows that the company is now committed to focus in these areas completely in the future. It is also represented in its investment in these areas. The auto driving car model 2.0 is one of the examples.
Stock Recommendation: Baidu Inc.
Based on the DCF analysis, the stock recommendation would be to hold the stock. However, based on the Ratio Analysis, and Price per Earnings Ratio Analysis, the suggestions would be to BUY/HOLD the stock.
References
Baidu Inc. (2018). Baidu Announces First Quarter 2018 Results. Retrieved May 21, 2018, from Baidu Inc: http://media.corporate-ir.net/media_files/IROL/18/188488/2018/BIDU%20–%20Q1%202018%20Earnings%20Release-d.pdf
Baidu Inc. (2018). Baidu Corporate. Retrieved May 9, 2018, from Baidu Inc Investor Relations: http://ir.baidu.com/phoenix.zhtml?c=188488&p=irol-homeprofile
Baidu Inc. (2017). Baidu Inc 10K 2017. Retrieved May 21, 2018, from Baidu Inc: http://media.corporate-ir.net/media_files/IROL/18/188488/2018/Baidu%202017%20Form%2020-F.pdf
CFRA Equity Research. (2018). Stock Report Baidu, Inc. Retrieved May 21, 2018, from https://www-capitaliq-com.rlib.pace.edu/CIQDotNet/Research/DocumentViewer.aspx?versionId=325789086&formatType=4&activityTypeId=2891&researchDocumentId=38811666&fileName=
CFRAEquityResearch_CFRAREITERATESHOLDOPINIONONADSSOFBAIDU%2cINC_Apr_27%2c_2018
Morningstar.com. (2018). Baidu. Retrieved May 21, 2018, from Morningstar: http://www.morningstar.com/stocks/xnas/bidu/quote.html
Standard & Poor Net Advantage. (2018). S&P Global Market Intelligence. Retrieved May 21, 2018, from http://libguides.pace.edu/az.php?a=s
Statista.com. (2018). The worldwide desktop market share of leading search engines from January 2010 to October 2017. Retrieved May 21, 2018, from Statista.com: https://www.statista.com/statistics/216573/worldwide-market-share-of-search-engines/
Yahoo Finance. (2018). Baidu. Retrieved May 21, 2018, from Yahoo Finance: https://finance.yahoo.com/quote/BIDU/history?ltr=1&guccounter=1
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