The market has been shaken recently with news that Baidu (NASDAQ: BIDU) has been put on a list of companies that could potentially be delisted from US exchanges, along with other Chinese stocks. It's also part of other bad news for the company, including a slow down in economic activity in China and reduced factory output production. The bad news has resulted in the stock losing -15.21% over the last month, and some analysts expect it to fall to lower levels still. Despite the sell-off, some investors are bullish on the company's potential and see its improved valuation as a buying opportunity. So in this article, we'll explore the reasons to invest in Baidu and some reasons not to.
Baidu's valuation has improved dramatically compared to its previous levels, but on a comparative basis to its sector, it's still above the sector medians. Something to keep in mind is that the company's diluted EPS is currently negative at -2.88 due to a -103.45% reduction in its net income YoY. So although the company's valuation has changed, this can partially be explained through a change in the company's fundamentals over the short term, and not mostly from a market rotation out of riskier assets that can be observed in other stocks.
BIDU's FWD GAAP P/E ratio compares favorably to some favorites in the communication sector, such as SaaS stock, as it still trades at a premium of 344.98, which is a fraction of Baidu's valuation of 39.72 on the same ratio.
The company's FWD Non-GAAP P/E ratio is 18.13, and this matches the sector median of 17.88. The company is relatively undervalued to what the company was valued at over the last five years, as its FWD P/E ratio for this period stands at 31.86. Other ratios convincingly beat the sector median, such as its FWD Price / Book ratio of 1.36 compared to the median of 1.36.
Sector-beating Price Return
Perhaps surprisingly, Baidu has managed to outperform companies in the communication sector over the last year and in the most recent three months. YTD the company is down -17.68%, while the sector lost -30.47%. For the last three months, Baidu gained 8.73% while the sector shredded -8.37%. However, the company is not beating the broader market, as its price return for the last five years is negative at -40.16%, while the S&P 500 returned 66.32%.
The Downside: Growth Projections Are Below Average
One aspect of Baidu that is underperforming is its recent revenue growth numbers as well as its projected growth for the future. On a YoY basis, the company's revenue grew 10.75%, which is -22.98% below the sector's performance of 13.95%. Its EBITDA growth, which is commonly a proxy for cash, is one of the company's worst metrics, with a contraction YoY of -26.88%. The industry sector, by comparison, grew by 3.61%.
Other communications stocks in the sector also had their revenues shaved off across the board, including Twitter (NYSE: TWTR) which grew 17.45% YoY. On a five-year revenue CAGR basis, Baidu is underperforming Twitter as a benchmark as its revenue grew 11.74% over this period while Twitter's revenue grew 16.32%.
Despite the contraction in its revenues and EBITDA, Wall St remains bullish on this stock. For the last 90 days, 21 analysts gave the stock a strong buy rating. This was accompanied with 6 buy ratings and 6 hold ratings. The stock is also trading well below the MarketBeat consensus price target with a 72.1% upside at the time of writing.