Why Baidu Inc (ADR) Stock Could See a 20% Rally

Shares of Baidu Inc (ADR) (NASDAQ:BIDU) have been struggling since its late-October earnings report. While Baidu beat on earnings per share estimates, it came up short of revenue expectations. So what should we make of the BIDU stock price being down almost 13% from its highs?

What Was So Bad About Earnings?

The BIDU stock price fell almost 8% in one day following earnings. How bad could it have been? The revenue miss was slight, but guidance came up really short. Management’s forecast for fourth-quarter revenue of $3.34 billion to $3.52 billion was below consensus estimates looking for $3.73 billion in sales.

Could this be a positive though? I think Baidu’s sales estimates came up short because it sold off its takeout and mobile games businesses. Management’s guidance calls for 22% to 29% growth, vs. expectations for ~35%. However, excluding its “disposed businesses,” revenue growth would be roughly 28% to 34%, management says. This is still short of analysts’ expectations, but not by nearly as much.

Underlying metrics are accelerating, and Baidu’s profitability is increasing, too. Operating margins jumped 1,100 basis points in the quarter as operating income jumped 69% year-over-year. Revenue per user soared 31% as the use of AI is helping enable customer growth for Baidu. Many call Baidu the “Chinese Google,” the latter of which is a unit of Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG).

Sales are still forecast to grow more than 20% this year and next. Earnings (uncharacteristically) should jump about 60% this year and grow just 4% in the following year. But beyond that, analysts expect 25% growth. As a result, the BIDU stock price trades at just 26.2 times 2017 earnings. That makes it look a lot cheaper than its ~42 times 2016 earnings valuation.

On a trailing basis, BIDU stock looks expensive, and that could be one overhang, even though it shouldn’t be considering its forward valuation. The same could be said for a number of growth companies, including Alphabet, Alibaba Group Holding Ltd (NYSE:BABA) and Facebook Inc (NASDAQ:FB).

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