It’s been a tough year for Chinese companies. As the US – China trade war dragged on, US equities have still performed well with the S&P 500 sitting near all-time record highs – up more than 22% in 2019. Shares of Chinese technology giant Baidu (BIDU) have been headed in the opposite direction for most of the year.
After topping out at nearly $280/share in May of 2018, Baidu’s share price had declined 62% to $107 last week. A combination of stale results and a slowing Chinese economy – along with the trade war – weighed heavily on Baidu shares. Baidu doesn’t sell any goods that are directly subject to tariffs, but the effect on the entire Chinese economy had reduced quantities and the prices of the company’s most profitable offerings.
After an excellent earnings report last week however, it appears fortunes may be changing for the company many investors refer to as the “Chinese Google,” making the recent share price declines a buying opportunity.
The shares rallied 15% quickly to $125, but have since settled back a bit to $118.
A slew of analyst upgrades and positive earnings revisions after the most recent report earn Baidu a Zacks Rank #1 (Strong Buy).
A decade ago, Baidu grew dramatically as the largest Chinese internet search and advertising company in a country with a rapidly expanding middle-class that in many cases was utilizing the internet for the first time. Over the past few years however, Baidu has seen revenues stagnate amid increased competition and deteriorating Chinese economic conditions. The company recorded it’s only quarterly loss ever in Q1 2019.
After several quarters of flat or declining sales, Q3 marked a turnaround with revenues up 7% over the previous quarter and adjusted net earnings of $1.76/share after one-time items. That was 40% higher than the Zacks Consensus Estimate of $1.25/share.
The company also raised guidance, increasing sales estimates for the next quarter to a range of $3.78B to $4.02B. They didn’t forecast a net earnings figure, but based on the revenue increases, the Zacks Consensus Earnings Estimate for full year 2019 has risen 27% from $4.40/share to $5.58/share in the past 30 days. That’s still well off the $9.64/share Baidu earned in 2018 - but keep in mind that the stock traded at more than double the current level in 2018.
Over the same 30-day period, 2020 expectations have grown even more – from $5.97/shareall the way to $8.45. If Baidu continues to recover, there’s significant room for share price appreciation.
In fact, at the current price, Baidu’s 12M forward P/E Ratio of 21.2X is significantly lower than Alphabet (GOOG) at 27.9X. After its meteoric rise as one of the most recognizable and successful Chinese companies following its 2005 IPO, it once seemed extremely unlikely that we’d be ever calling Baidu a “value” stock, but thanks to the recent declines along with rising expectations, that’s exactly what it now is.
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