Is Baidu a Value Investment?

The failure of Baidu (NASDAQ: BIDU) to find a global audience casts serious doubt on the theory China will control the data economy.

In fact, Baidu had just 1.1% of the world’s search engine market share in August 2019, Statcounter estimates.  In contrast, America’s search engine Alphabet’s (NASDAQ: GOOG) Google had 92.27% of the world’s search engine market.

Thus, Baidu is a failure outside of China but at home it is a huge success. Statista estimates Baidu had 93.2% of the Chinese Search engine market in September 2017. However, Baidu had some market penetration outside China. For instance, Baidu had 1.2% of the US search engine market and 2% of the Japanese market.

Could Baidu be a Value Investment?

Cynics will look at these figures and say Baidu cannot succeed in any market the Chinese Communist Party does not control.

However, Baidu could have a 93.2% market share in the world’s second largest economy. Trading Economics estimates China had a gross domestic product (GDP) of $13.608 trillion in 2018. Plus, China had an annual GDP growth rate of 6.4% in 2019.

Baidu had a 42.98% of China’s desktop search market and a 78.63% share of China’s mobile search market on 10 June 2019, Extended Ramblings estimates. Therefore Baidu had a 64.55% share of China’s market on the same day.

In addition, Baidu has a huge platform that reached 1.1 billion mobile devices in May 2019, Extended Ramblings estimates. Additionally, Expanded Ramblings claims Baidu’s platform had 200 million daily app users and two million publishers on the Baijiihao in August 2019.

Moreover, the Baidu mini-program platform offered 150,000 mini programs; decentralized apps (DApps), to 270 million monthly users on 16 August 2019. Therefore, Baidu has a nice business in China even if it is uncompetitive globally.

Is Baidu Making Money?

Currently, Baidu is making some money in the form of $3.852 billion in revenue and $1.494 billion in gross profit on 30 June 2019. That led to a net income of $353 million on the same day, Stockrow reports.

However, Baidu reported no free cash flow or operating cash flow on June 30, 2019, probably because it is Chinese and has different reporting rules than American companies. Conversely, Baidu reported a financing cash flow of $2.278 billion, and operating cash flow of $5.432 billion on 31 December 2019.

Yet Baidu is a cash rich company. It reported $19.996 billion in cash and short-term investments on 30 June 2019.

Baidu vs. Google

A comparison with Alphabet (NASDAQ: GOOG) exposes Baidu as small time.

For example, Alphabet (NASDAQ: GOOGL) reported $121.056 billion in cash and short-term investments, an operating cash flow of $16.627 billion, a free cash flow of $6.467 billion, revenues of $38.944 billion, a gross profit of $21.648 billion, an operating income of $9.18 billion and a net income of $9.947 billion on 30 June 2019. Impressively, those numbers are only for Alphabet’s operations in the quarter ending in June 2019.

Based on these numbers, I do not consider Alphabet and Baidu competitors. Like Yahoo! and Microsoft’s (NASDAQ: MSFT) Bing, Baidu is incapable of competing directly with Google.

How Secure is Baidu’s Monopoly?

I do not believe Baidu will become a globe spanning Data Empire such as Alphabet. Instead, Baidu is an interesting regional player that takes advantage of unique political circumstances.

History teaches that political circumstances can change overnight. The Soviet Union, the state Mao modeled the People’s of Republic of China upon, crashed overnight in 1991, for example. Moreover, the nearly 1,000 year-old French monarchy collapsed in a few short years in the 1790s.

On the other hand, political systems can last for a long time. In particular, the United States has had the same basic political system since 1789 when the Founding Fathers adopted the current Constitution. Plus, the United Kingdom has had the same basic constitution since the Glorious Revolution of 1688.

Thus, Baidu bases its business model upon a unique political situation that could change quickly. That seems like a poor investment to me.

Baidu is a Poor Investment

I think Baidu (NASDAQ: BIDU) is a poor investment that Mr. Market overpriced at $102.76 on 30 September 2019.

In contrast, Alphabet (NASDAQ: GOOG) stock was trading at $1,221.14 on the same day. Thus, I consider Baidu a better investment that Alphabet (NASDAQ: GOOGL) but only because Mr. Market grossly overprices Google’s owner.

Baidu’s search engine footprint is small and confined to one country. In addition, Baidu pays no dividend. I advise investors to stay away from Baidu.

I advise those interested in Chinese tech stocks to investigate companies with real growth potential. My picks in that area are Tencent Holding (OTCMRKTS: TCHEY) and Alibaba (NYSE: BABA).

For example, Tencent owns the fifth largest social media network WeChat which had 1.112 billion users in July 2019, Statista estimates. Plus Tencent owns one of the largest mobile payment apps; WeChat Pay, with 1.1 billion users in Febraury 2019. Plus, Tencent is one of the largest players in video games. Its holdings include Riot Games’ League of Legends which had 67 million players a month in 2014, Dot Esports claims.

Baidu is Overvalued

Meanwhile, Alibaba is one of the world’s largest e-commerce platforms. Statista estimates Alibaba had 674 million active annual consumers in 2nd Quarter 2019. That number grew from 576 million active annual customers in 2nd Quarter 2018. Hence, Alibaba’s consumer base grew by 98 million in 12 months, in Statista’s estimate.

Given the growth rate I think Mr. Market undervalued Alibaba (NYSE: BABA) at $167.23 on 30 September 2019. However, Mr. Market overpriced Baidu Inc. (NASDAQ: BIDU) at $102.76 on the same day. Meanwhile, I believe Mr. Market undervalued Tencent Holdings (OTCMKTS: TCHEY) at $41.63  on the same day.

In the final analysis, I think Baidu is an overvalued stock that will collapse soon. Thus, I advise those interested in Chinese stocks to avoid Baidu and look at Tencent Holdings and Alibaba.