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Monday August 09, 2010
Baidu (BIDU): 'For all growth investors'
by Timothy Lutts, editor Cabot Stock of the Month  Baidu (BIDU), our latest recommendation, grew revenues at a rate of 76% in the latestquarter, grew earnings at a rate of 112%, and boasts a massive after-tax profit margin of 44.9%. In our mind, every growth-oriented investor should consider buying this stock. While Google’s market share in China fell from 31% in the first quarter to 24% in the second quarter, Baidu, which is arguably the most aggressive censor in the Chinese market, saw its market share climb to a record high of 71%. Equally impressive, while Google’s market share of mobile search—a small but faster-growing segment—fell to 12.3%, Baidu’s market share rose to 34.3%. But Baidu’s advantage goes far beyond its eagerness to appease government authorities. Experts say Baidu has always had superior search programming, which can interpret both native Chinese language search terms and phonetic or “pin-yin” search, which allows users to type in Chinese keywords using English alphabets. 
Additionally, Baidu has been an adept adapter, taking services offered by U.S. companies like Google, Yahoo, Microsoft, Apple and Facebook and tweaking them for the Chinese market, all with the goal of getting users to make Baidu their default Internet destination. And it’s worked. Baidu’s search categories today include web, image, movie, map, government, MP3, news, mobile, legal, university, video statistics, patent and more. Its communities include greetings, encyclopedia, space (personalized web pages), music, game, entertainment and more. There’s also dictionary, Baidu favorites, anti-virus, finance and more. Chasing after all Baidu’s users, naturally, are advertisers. At the end of the second quarter, Baidu had about 254,000 active online advertising customers, representing a 25.1% increase from the corresponding period in 2009. Revenue per online advertising customer for the second quarter was approximately $1,106, a 38.9% increase from the corresponding period in 2009. And Baidu’s costs are falling! Traffic acquisition cost for the quarter was 9.7% of total revenues, compared to 16.0% in the corresponding period in 2009. And bandwidth costs were 3.5% of total revenues, compared to 4.6% in the corresponding period in 2009. Meanwhile, cash is growing. At the end of the quarter, the company had $872 million on hand. The result was an obese profi t margin of 44.9% in the second quarter, up from 38.6% in the first quarter. That’s a profi table business! Finally, there’s the chart. BIDU has been trading since 2005. Like most stocks, it topped in 2007 and bottomed at the end of 2008. It returned to its old high at the end of 2009, and broke out to new highs in February of this year, just around the time news spread that Google was exiting China. From May through July it built a solid base with resistance at 78, and recently -- following a great earnings announcement -- it broke out of that base and began another advance. With a healthy bull market at its back (the one remaining question today), this stock can go much farther. Learn more about this financial newsletter at Timothy Lutts' Cabot Stock of the Month. |
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