BIDU: Baidu Inc
Internet Search Engine: uses Chinese Characters
Recent Range: $15/share – $110/share (Current Price: 101.25, as of close of 12/21/10)
Price/Sales (P/S) = 34.92 (10.24, Industry)
Price/Book (P/B) = 32.55 (7.89)
Gross Margin = 70.7% (64.6%)
Pre-Tax Margin = 48.2% (34.3%)
Debt/Equity Ratio = 0.00 (0.04)
Current Ratio = 3.6 (4.3)
Return on Equity = 48.5% (23.0%)
Return on Assets = 37.9% (18.0%)
Analysis: This company is definitely in a hot industry within a hot geographic region (China). It also appears to manage its money really well. I really like the company, but I am afraid of the stock.
The business was doing well, anyway, but it really soared when Google was basically booted from China. (They could stay there, but they could not advertise there. Of course, that is Google’s income source.)
Their portion of the Chinese Internet market was already the highest, but once Google left, most of it came to them, even though there are a couple of other Chinese “competitors,” but there really is only one name within the Chinese Internet market, and it’s Baidu.
They keep posting record setting profits. Even though China’s growth has slowed, it’s still really rapid, just under 15% was the last figure that I heard. The US would take this “slow” growth rate. So the market is really good, still.
Plus, they have more than enough cash on hand, and they generate a ton of income. So they really do not even need as much cash as most other companies the same size. So the company is in really good shape.
However, this stock seems to be repeating a lot of what the dot-com stocks did toward the beginning of the millennium (2000). The price seems to be going really high, based upon investor hope and greed.
It is really tough to price intellectual property, which is the biggest value of any Internet Search Engine. Even so, Baidu’s stock is price over thirty times (30X) its Book Value, Annual Sales, and Earnings. The industry norm is ten percent (10%) or less in each of these categories.
To put some of this in perspective, a Price/Sales of over 30X means that if they got 30 years worth of sales advanced to them, they still would not have enough to buy the company.
How can this NOT be overpriced, especially for a company that only has intangible value—not hard assets?
I see this as a perfect stock to watch for a freefall. Since the company is really good, see if people stop being crazy and spending too much, and see if they become crazy and sell for too little.
What price would be “too little” to sell?
That’s a tough call, because you can only guess the value of something that is only an idea.
My suggestion is to wait for people to go through a stage where they hate Chinese investments, and the stock prices reflect that hate. Then if this company is still really healthy with a solid business model, this might be a perfect candidate to make a legal heist.
Until then, when you buy this stock, you’re riding in a hot air balloon without knowing the upcoming weather forecast. It might be sunny. Then again, it might be…
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