Baidu Inc (BIDU, Financial) has experienced a daily gain of 5.91%, yet over the past three months, it has faced a loss of 6.42%. With an Earnings Per Share (EPS) of 6.11, investors are considering whether the stock is modestly undervalued. This article aims to delve into the valuation analysis of Baidu (BIDU), exploring the reasons behind its current market position and whether it presents a worthwhile investment opportunity based on its intrinsic value.
Company Introduction
Baidu Inc (BIDU, Financial), the largest internet search engine in China, holds an impressive 84% share of the market as of September 2021. The company's core revenue, which constitutes 72% of its total, comes from online marketing services via its search engine. Beyond this, Baidu is heavily invested in technology-driven initiatives including artificial intelligence, cloud services, video streaming, voice recognition technology, and autonomous driving. With a current stock price of $120.12 and a GF Value of $147.45, Baidu's valuation warrants a closer examination.
Summarize GF Value
The GF Value is a unique measure of a stock's fair value, incorporating historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. When the stock price hovers significantly above the GF Value Line, it may indicate an overvalued stock with potentially poor future returns. Conversely, a price well below the GF Value Line suggests an undervalued stock with the prospect of higher future returns. Baidu's current market cap stands at $42 billion, and with a price of $120.12 per share, it appears to be modestly undervalued, hinting at the possibility of better long-term returns relative to its business growth.
Link: These companies may deliver higher future returns at reduced risk.
Financial Strength
Investing in companies with robust financial strength reduces the risk of capital loss. Baidu's financial strength can be assessed by examining its cash-to-debt ratio and interest coverage. With a cash-to-debt ratio of 2.08, it fares worse than 63.7% of its peers in the Interactive Media industry. Nevertheless, GuruFocus ranks Baidu's financial strength as a fair 7 out of 10.
Profitability and Growth
Consistent profitability is a key indicator of a company's investment potential. Baidu's profitability over the past decade has been stable, with a strong operating margin of 15.37%, ranking better than 73.01% of its industry competitors. The company's profitability rank is a solid 8 out of 10. When it comes to growth, Baidu's average annual revenue growth rate is 4.8%, which is lower than 58.27% of companies in the Interactive Media industry. However, its 3-year average EBITDA growth rate of 10.2% is more competitive, ranking better than 52.81% of the industry.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC) is essential to evaluate profitability. If ROIC exceeds WACC, the company is generating value for shareholders. Baidu's ROIC over the past 12 months is 7.19, surpassing its WACC of 6, indicating effective value creation.
Conclusion
In summary, Baidu (BIDU, Financial) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is robust. With growth that is competitive within the Interactive Media industry, Baidu presents an interesting case for investors. For a deeper understanding of Baidu's financial health, interested investors can review its 30-Year Financials here.
To explore high-quality companies that may deliver above-average returns, consider using the GuruFocus High Quality Low Capex Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
