$BIDU-SW(09888)$ $Baidu(BIDU)$
Welcome back! Today, let’s take a look at Baidu, a major Chinese company that’s often compared to Google. Baidu dominates the search engine market in China, controlling over half of the market share, which is the core of their business. But they also have a presence in other sectors like their own version of Netflix or YouTube, autonomous driving, AI, cloud services, and more. They’re essentially China's equivalent to Alphabet, but with the added challenge of operating in a market where Alphabet itself is banned.
While Baidu’s overall business growth has been fairly flat recently, some of its smaller, high-growth divisions are showing progress. They’ve acknowledged tough market conditions but are focusing on cost control. On the bright side, their margins are improving, with some segments reaching mid-teens to even 20%. What's noteworthy is that they’re investing heavily in areas like autonomous ride-hailing, AI, and even AI-powered biotech, which could drive significant growth moving forward.
Baidu is still generating a lot of revenue from its search engine, much like Google. It’s pulling in around $3-4 billion, and with a market cap of roughly $20 billion, the company is among the least valued compared to other Chinese tech giants. Despite their lack of overall growth, they’ve been able to keep their older investments profitable, and margins are maturing, which is promising.
Financially, Baidu is in a solid position. Their current assets cover all liabilities, and they have very little debt, which they’ve been reducing since 2021. Impressively, they’ve built up about $38 billion in equity for a $30 billion market cap. Additionally, Baidu holds roughly $4 billion in cash, $14.8 billion in short-term investments, and another $12.6 billion in long-term deposits. In total, that’s more than the company’s entire market cap in cash and interest-bearing deposits. However, the challenge here is that they've been earning relatively low returns on this cash—around 3-4%—which feels underwhelming given the tech they’re involved in.
Looking at the potential for an acquisition, Baidu's financials are compelling. If you were to buy the company for around $40 billion (a premium on the current price), you'd get $30 billion in cash minus $20 billion in liabilities, leaving $10 billion in cash. Then, there’s an additional $30 billion worth of assets on the balance sheet, making the physical assets seem nearly as valuable as the company itself. But it's important to note that the company has been in this position for a while, so this undervaluation may not last forever.
Baidu’s main focus recently has been on maintaining a strong cash position and repaying debt, but with the shift in China’s policy, things could change. China is rolling out measures to stimulate the economy, including rate cuts, wage increases, and market support, which could boost confidence in Chinese stocks. If market confidence returns, Baidu could see a significant revaluation, potentially trading at 15-20x cash flow.
In the broader picture, U.S. and EU rate cuts could shift capital into higher-risk investments looking for better returns. While U.S. treasuries are offering yields of 4-5% (historically a great yield), they aren't without risk—especially when comparing it to Chinese companies, where the system is different and often seen as riskier.
Lastly, Baidu announced a $5 billion buyback program in 2023, completing about $1.4 billion so far, which leaves about $3.6 billion left to go. At that pace, the buybacks could provide a solid return, with more than a 10% yield in total.
All in all, Baidu presents an interesting case. The company has been dealing with slow overall growth but is positioning itself for future potential with investments in high-growth sectors. The balance sheet is strong, but the underwhelming returns on cash could become a point of concern unless they find better investment opportunities soon.
Valuation
Baidu doesn’t pay a dividend, but they’re definitely in a position to offer a solid one if they wanted to. Let’s consider a worst-case scenario with falling interest rates and some internal challenges. If their earnings drop to $2-2.5 billion per year and they’re trading at an 8x multiple, that would put their market cap at $20 billion, or a price of about $56.95 per share—representing a potential loss of around 30%. However, can they fall that much? It’s possible, but their strong balance sheet provides a safety net. In a worst-case situation, the cash alone could cover the entire investment, essentially making it free money for a potential buyer. And even if a buyout isn't allowed, they could still do massive buybacks, which the market has responded positively to in the past. If they were to announce a $10 billion buyback program (which is about half their market cap), the market would likely react very well.
In a second scenario, let’s say that lower interest rates push Baidu into making some strategic investments, and they stabilize at $3-3.5 billion per year. With a multiple of 10, that would give them a market cap of $35 billion, or about $99.66 per share—a 25% gain. They were close to that even as recently as December, so it’s not unrealistic.
In a best-case scenario, let’s assume their investments and China’s policy shift pay off, and they grow to $4-4.5 billion per year. With some renewed market confidence and a 15x multiple (which is still relatively low), Baidu could reach a market cap of $67 billion, or $192.50 per share—a potential profit of around 140%. It’s possible this could play out in the next few years, but of course, things could also go the other way. China presents unique risks, but the risk-to-reward ratio looks pretty appealing to me.
Conclusion
Personally, I’ve already made a small investment recently. I understand they haven’t been able to do much better over the past few years due to market conditions, but with the policy shift and all that cash on hand, it’d be a pretty big achievement if they don't perform better than a 3% return on investment. Overall, Baidu is interesting. The company is in a strong financial position, making a lot of money, and holding a lot of cash. With the shift in policies and the pressure to find better investment opportunities, they have potential for significant growth.
They don’t have to stick to just one industry. Like other big tech companies, they can diversify horizontally and vertically. Baidu is already making moves into EVs, autonomous ride-hailing, smart devices, and more. With $30 billion in cash, they can potentially invest in almost anything they want, anywhere in the world—not just in China. But, of course, investing in China always comes with political risk and a different system compared to what we’re used to in Western markets.
As always, the information I cover in my articles shouldn’t be the sole basis for your investment decisions. Please do your own research before making any moves.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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