For many U.S. investors, Baidu Inc (ADR) (NASDAQ:BIDU) stock hasn’t really been on their watch lists. But with its price surging more than 40% in less than three months, can you afford not to take a look at Baidu stock?
BIDU Stock: The Google of China
For those not familiar with the company, Baidu is known as “the Google of China.” It operates the most widely used search engine in the country—Baidu.com. And just like Google, it also has its moonshot projects.
Of course, what investors really care about is whether Baidu can keep making money. And on that front, there is good news.
The company recently reported earnings. In the first quarter of 2016, Baidu’s revenue jumped 24% year-over-year to 15.82 billion yuan. Its adjusted earnings came in at 6.80 yuan per share, 20% higher than Wall Street’s estimate of 5.64 yuan. (Source: “Baidu Announces First Quarter 2016 Results,” Baidu Inc, April 28, 2016.)
As we’ve seen quite a few times recently, good revenue and earnings-per-share (EPS) numbers might not be enough to boost a company’s stock price.
The market also cares about what the company has to say about its future performance, though.
Luckily, Baidu issued a very impressive guidance. In the second quarter of 2016, the company projects revenue of 20.11 billion yuan to 20.58 billion yuan. Even the lower end of its guidance turned out to be higher than Wall Street’s expected revenue guidance of 20.08 billion yuan.
The company’s dominance in China’s search engine market needs little introduction. However, future growth could come from Baidu’s other segments.
For instance, the company has a booming “Transaction Services” platform. Essentially, the platform connects online consumers to services at physical stores. In the reporting quarter, gross merchandise value for Transaction Services skyrocketed a whopping 268% year-over-year.
Complementing its online-to-offline platform is “Baidu Wallet”—the company’s own digital payment service. At the end of March, activated accounts on Baidu Wallet have reached 65 million, representing a 152% year-over-year increase.
Baidu Stock: V-Shaped Recovery
But it’s not this earnings report that sparked the upward trend. In fact, the catalyst behind Baidu stock’s recent rally was its previous earnings report.
Chart courtesy of www.StockCharts.com
Towards the end of 2015, BIDU stock started a dramatic downturn, plunging more than 35%, from $217.97 to $140.68. But most of that loss has been recouped by now. Since its previous earnings report in early February, the stock has been enjoying a nice V-shaped recovery.
The climb was quick in for the first month or so, but since late March, the slope seemed to be flattening. Thanks to today’s gain, the series of higher highs and higher lows have not been broken. And the upward trend could be continuing.
A solid earnings report also turned analysts bullish on the company. For instance, Brean Capital analyst Fawne Jiang upgraded Baidu stock from a “Hold” rating to “Buy” with a price target of $235.00. Compared to where the stock is trading at right now, that represents an 18.5% potential upside. (Source: “Brean Upgrades Baidu to Buy, Sets $235 Price Target,” Benzinga, April 29, 2016.)
“With BIDU continuing to divest loss-making assets, core search margin stable, and O2O promotion having potentially peaked, we expect improving earnings visibility in the coming quarters,” remarked Jiang. (Source: Ibid.)
The Bottom Line on Baidu Stock
Note that even after its nice rally, Baidu stock is not really expensive. Trading at $198.27 a piece, the company has a forward price-to-earnings multiple of 3.5X. If you want a piece of the action in China’s economic growth, BIDU stock is well worth considering.