We were not fully prepared for the sharp sell-off in Baidu stock on Tuesday when BIDU opened up in the $360 range, down from the $430 level where it closed on Monday. As the Google of China the stock has a short and compelling positioning that many would say make it a “must own” kind of name. Of course it trades at a high valuation based on conventional metrics.
This was a perfect time to put our Intrinsic Value (IV) model to work. Our IV for 2010 came to $496 which is what we tend to use to capture a one year return view on a stock. With current trading around our 2009 value of $372 it was a perfect opportunity to add shares to the model portfolio.
After we completed the work and added in some other factors our conviction level became quite high. BIDU has a TEV a bit above $14B. Compare that to Google with a TEV of $153B. Of course Baidu is at an earlier stage of development but they continue to dominate search in China.
Unlike other parts of the world China is not going to let Google get a majority market share there, not unless the revenue stays in China. The Europeans have realized first hand how devastating it can be. Today billions and soon tens of billions of advertising dollars will be flowing out of Europe and into the US-domiciled Google. Nobody in Europe is happy about it and the concerns are getting more acute.
Although China is a puzzle of good and bad the fact is that Baidu is in a very strong position to grow into higher valuations even from our current IV of $496. At current growth and profitability trajectories the shares will be over $600 in 2011.
Google has transitioned through some different versions of their online system before and even guided investors to very low “seasonal” results in some past summers. Post these short-term cautions the stock has done extremely well. These are companies that have massive secular growth trends firmly in their grasp. When the IV is attractive these stocks should always be on the top of your “buy list.”
Although the shares have bounced we are not suggesting we know where they will trade in the short term. Only that the company is worth $496/share in the next 12 months and $650 per share in the next 24 months.
[Disclosure: Our Research 2.0 model portfolio added BIDU as a position yesterday.]
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