Talking Stocks: Baidu, Inc.
Updated: Jun 23, 2021
How many days could you survive without Google?
My guess is not too many.
China's Baidu Inc. suffered a ~33% drop in stock price over the past few weeks, despite being the leading search engine of the country.
Poor financials? Bad management decisions? Extreme losses?
None of the traditional reasons were why this stock plummeted.
A quiet hedge fund named Archegos Capital had a not-so-quiet blowup last month, whereby its portfolio of stocks suffered massive losses because - in non-jargony terms - the founder took on way too much risk for the size of his funds.
Think of it like for every $5 he had, he was betting $100 in the markets.
When investors realized the consequences of how much risk he - founder Bill Hwang - was taking, it led to the entire market selling off their investments in his company because they needed to protect themselves before things got bad.
And they got bad quickly. Very quickly.
On March 22nd, investors (mainly all the big banks) started ridding themselves of everything that had attachments to Archegos. In other words, all the stocks they were holding on his behalf went out the window —
One of those companies was Baidu Inc.
The stock lost almost a third of its value even though there was absolutely no change in the dynamics of the company itself.
Let's look at why Baidu is a BUY after its meltdown last week.
Who can survive without Google?
While Google's search engine dominates the rest of the world, Baidu's presence in China is no joke.
Its 5.6B views per month made it the 7th most viewed website in the world last year: a feat that trounces the likes of WhatsApp and Netflix and is catching up to Instagram, Wikipedia, and Twitter as we speak.
In other words, how sustainable is a 30% drop in stock price when the company's dominance is so pervasively clear?
With a strong balance sheet, only 39% in debt-to-equity, and consistent cash flows of around $3 billion each year, Baidu's financials don't reflect the poor stock price performance we're currently seeing either.
In other words, the company's solid foundation should warrant a higher price level assuming all else stays equal — but what exactly is that price?
Here's where Simply Wall Street's analysis says the stock should be sitting at:
Under this assumption, we have a chance at doubling our money by going into Baidu at these levels. How accurate is the math behind that analysis?
I'll leave it for you to decide. But even if we don't reach the $411 level on Baidu shares, the fundamentals of this company seem too promising for it remain at a meager $210 for long.
On those grounds, I think a run back to ~$300 is not too far-fetched.
Money to China.
As US stocks (whether it's Tesla, GameStop, or good old-fashioned banks) dominate the news, we're reminded of one of Warren Buffet's many quotes:
"Be greedy when others are fearful, be fearful when others are greedy".
There's seems to be a lot of greed in US markets at the moment. The S&P500 and the Dow Jones index keep hitting record highs while the rest of the world's markets go far more unloved.
Investors are becoming a lot more fearful of Chinese stocks because of the political tensions that surround them, creating an opportunity for those who are ready to take on a little volatility in return for long-term reward.
It's time to get greedy.
We wrote an article on Alibaba's stock price drop 2 weeks ago as well, noting how its depressed price doesn't reflect the powerful financials, its solid potential, and the fact that it's pretty much the Amazon of China. The market also began to realize this after we got past the fines imposed on BABA and saw a 10% gain on the stock in a single day —
We're seeing a lot of parallels for Baidu here too.
What do you think? Buy rating on Baidu or is it better to stay bearish?
I'm with the former and opened a position at $210. Let me know what you do, I'll catch you in the next one 👋.
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