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Author: TMFBreakerWade Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 89  
Subject: 1% Baidu Date: 9/2/2008 8:24 AM
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Baidu (Nasdaq: BIDU)

Why I like it
1. I think that Baidu might very well be, - the safest way to get in on the massive potential of the Chinese economy.
2. China has recently passed the United States with 250M people online. That’s 1/5 of their population btw.
3. Put China in perspective, the growth rates are staggering. GDP is up 8-9% per year, advertising is growing between 15-20% and online advertising is up 40%. Baidu is clearly in a position to capitalize.
4. It’s the top dog. Commands 74% of Chinese web traffic and 61% of search engine market spending. For perspective, (in China) Google only owns 26% of the ad revenue market.
5. China is only up to 51% internet usage while the United States has a market penetration of 71%.
6. At the Fools advisor roundtable David, Bill, and James Early all said Baidu was their favorite pick for 2008 (among the Foolish advisors top picks). It’s rare to see all of them agree on 1 stock.

Business
Baidu is the leading Chinese internet search provider and the largest website in China as measured by user traffic. It also offer’s online community based products and entertainment platforms. Like Google they are constantly developing and introducing new programs. For example one of these newer programs is Baidu Movie, which allows users to watch and download free movies, TV series, and cartoons.

Risks
1. Imo, the primary risk to any Chinese business is government interference and internal corruption. Thus far I have not seen evidence of either affecting Baidu.
2. Baidu could experience a failure to attract additional customers and increase spending per customer.
3. If some other search portal somehow, someway, took its top dog status – I would be very concerned.
4. No doubt about it, at 31 times Price to Sales, Baidu is a richly valued stock. The problem is, I’m not sure this one will ever be cheap. However, if growth rates were to slow the company would be taken behind the woodshed and beaten worse than most.

Management
Ownership – According to the 20F Ceo Robyn Li owns 5.6M shares or 16.4% of the company. Combined all directors and executives own 20% of Baidu.
Allocation – When Baidu spends money, it focuses on natural transitions that will accentuate the core business. For comparison’s sake: Bidu Roe 40.1% Roc 23.7%. Google’s Roe 21.2% and Roc 16.1%.
Tenure – Robyn Li is the co-founder has been with the company since inception and has been the Ceo since 2004. Prior to starting Baidu, Mr Li worked as a staff engineer for a pioneer company in the Internet search industry. I would say, he has the right experience for the job.
Stewardship – Since the IPO, management has controlled the share count. What started at 32.3M shares has grown to only 34.2M shares. Stock based compensation is reasonable at only 9.3M TTM, that’s 7.84% of net income and 2.6% of sales.

Valuation
Even if I assume a 13% discount rate with a very conservative 50% growth rate yrs 1-5 years (for perspective, bottom line growth was up 108% quarter over quarter), then 25% yrs 6-10 with a 3% terminal, I value Baidu at around $410 per share. If I’m close, that would yield a safety net of about 20%. I consider this an exceptional deal for such a bright prospect.
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Author: TMFRichDad Big gold star, 5000 posts 10+ Year Anniversary! Old School Fool Coverage Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73 of 89
Subject: Re: 1% Baidu Date: 9/2/2008 5:46 PM
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Valuation
Even if I assume a 13% discount rate with a very conservative 50% growth rate yrs 1-5 years (for perspective, bottom line growth was up 108% quarter over quarter), then 25% yrs 6-10 with a 3% terminal, I value Baidu at around $410 per share. If I’m close, that would yield a safety net of about 20%. I consider this an exceptional deal for such a bright prospect.


Minor comment. I just find it exceedingly unusual that when projecting 50% growth for 5 years followed by 25% growth for another 5, that only a 20% margin of safety would be considered adequate. I'd guess that if you knocked that 50% growth down to 45% (holding everything else constant), your margin of safety would evaporate. Nothing wrong with buying a growth stock and ignoring valuation. Lots of money can be had that way, I'm sure. I just don't think it wise to kid yourself that you are buying value when I don't think you can reasonably say you are.

Assuming Baidu grows that fast, that long, how big will it be?

Bigger than Exxon? Bigger than Google? 5xGoogle? Bigger than US?

I could be way off in left field though. Never looked at Baidu.

Rich

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Author: TMFBreakerWade Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75 of 89
Subject: Re: 1% Baidu Date: 9/2/2008 9:29 PM
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Hi there Rich,

Another way to look at it would be to assume that years 10 and on Baidu will grow significantly more than that of inflation. As I'm sure you would agree a precipitous drop from 25% to 3% is a stretch. But for illustrative purposes, I just wanted to give you some feel for the valuation. I would encourage you to plug in your own projected growth rates, adjust your discount rate accordingly, and come up with something that you are more comfortable with.

The point, I don't want folks to get hung up on valuation. Baidu is not and it may never be a stock that a true value guy would consider. (A tough pill to swallow for those who live in IV land, - I know) =).

What I'm trying to get across is that Baidu is a pretty solid play on the greater Chinese economy. We know how Google played out, I would argue that Baidu is well on it's way to surpassing it. And, if that's true, a few percentage points at this stage of the growth cycle really won't matter all that much.

Thanks for reading and the comment,

Wade

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Author: TMFRichDad Big gold star, 5000 posts 10+ Year Anniversary! Old School Fool Coverage Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 76 of 89
Subject: Re: 1% Baidu Date: 9/2/2008 9:52 PM
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Hi Wade,


A tough pill to swallow for those who live in IV land, - I know) =).


LOL, not to worry, I sense they are looking for me and will come and drag me back before too long :)

One more comment, then I'll leave you alone.

To help my slow growth mind get a handle on what it actually means to grow 50% for 5 and then 25% for another 5. I did a simple compound growth calculation and came up with a $1 today will be $23 after those 10 years.

So, Baidu is currently a $10B business. Google is a $146B business. If your growth numbers are right, then Baidu will be nearly twice as big as Google is today, in 10 years.

I have no idea if that's reasonable or not. I know nothing of the business and even less about China. But, I thought I'd share it fwiw.

Good luck to you and thanks for the reply,

Rich

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Author: TMFBreakerWade Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 78 of 89
Subject: Re: 1% Baidu Date: 9/3/2008 9:51 AM
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Hey Rich,

Now you are starting to see the potential of Baidu!

For flavor and per Cap Iq,

The compounded annual growth rate over the last two years has been:

Sales: 113%
EBITDA: 163%
Net Income: 153%

Based on these numbers, I don't think a ST growth rate of 50% is unreasonable.

Thanks much for the time,

Wade

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