Searching for Profits at Baidu

12/08/2015 10:00 am EST

Focus: STOCKS

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Our latest featured buy recommendation was in our portfolio in 2006, 2009, 2012, and 2013, which makes it a known and reliable choice; we’ve pulled big profits out of it overall, notes Paul Goodwin, editor of Cabot Emerging Markets Investor.

Any investor who knows anything at all about China knows something about Baidu (BIDU). This is the Chinese language search engine company founded by Robin Li in 2000 that still dominates online search in China with a 55% market share.

Throughout its history, Baidu has never stopped growing. Using the same revenue strategy as Google (ALPHABET) (GOOGL)—auctioning keywords to advertisers—the company has a long history of growth.

We first featured Baidu in October 2006, when Internet penetration in China was just 9.4%. With penetration now up to 48.8%, the market is as massive as any in the world.

Monthly active users of Baidu Mobile search reached 643 million monthly active users in Q3 and mobile now accounts for nearly two-thirds of the company’s search traffic.

Baidu is engaged in a titanic struggle with China’s other online giants, Alibaba (BABA) and Tencent Holdings (700:HK).

Each company has its own base—search for Baidu, online sales for Alibaba, and messaging for Tencent—but each is also using its enormous cash flow to expand into new areas of the Internet.

Baidu’s purchase of a popular app store was the opening move in its campaign to catch up with the move to mobile devices.

And since 2011, Baidu has invested more than $5 billion into offline services like home delivery and education loans.

The company has also bought Nuomi Holdings (discounts, restaurant bookings, and movie services) and Edaixi (an Uber-style laundry pickup app).

This battle will continue, with Baidu’s $11.1 billion in total cash providing the ammunition.

The stock has been through a long, hard correction, falling from $252 in November 2014 to as low as $100 during the August 24 panic selling.

BIDU started a powerful rally in late September cruising past its 25- and 50-day moving averages in mid-October and overtaking its 200-day line on Monday.

The story has always been attractive, but it’s the rebound in momentum that’s pulling us back into BIDU. With good volume spikes and an estimate-beating quarterly report, all the elements are in place for BIDU to perform well.

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