Standing out among the Street's worst performers today is Baidu, a internet content & information company whose shares slumped -3.9% to a price of $93.23, 44.73% below its average analyst target price of $168.67. The average analyst rating for the stock is buy. BIDU lagged the S&P 500 index by -3.9% so far today and by -24.3% over the last year, returning -36.6%.
Baidu, Inc. offers internet search services in China. The company is in the communication services sector, which includes primarily companies with a cyclical profile whose share price is correlated with macro economic cycles. The exception is large telecom companies, which are more defensive in nature since their share prices have a looser correlation with recessions.
Baidu does not release its trailing 12 month P/E ratio since its earnings per share of $-7.16 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for BIDU of -13.0. Based on the company's positive earnings guidance of $9.13, the stock has a forward P/E ratio of 10.2. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the communication services sector has an average P/E ratio of 18.65, and the average for the S&P 500 is 15.97.
To better understand BIDU’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
Baidu’s PEG is 155.09, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Baidu's gross profit margin trends:
| Date Reported | Revenue ($) | Cost of Revenue ($) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 124,493,000,000.0 | 64,147,000,000.0 | 48.47 | -2.2 |
| 2020-12-31 | 107,074,000,000.0 | 54,003,000,000.0 | 49.56 | 18.37 |
| 2019-12-31 | 107,413,000,000.0 | 62,444,000,000.0 | 41.87 | -16.58 |
| 2018-12-31 | 103,877,000,000.0 | 51,739,000,000.0 | 50.19 | n/a |
- Average gross margin: 47.5 %
- Average gross margin growth rate: -0.1 %
- Coefficient of variability (lower numbers indicating more stability): 8.1 %
We can see from the above that Baidu's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.
Baidu's free cash flow was $9,226,000,000.00 as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, BIDU is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of -28.0% and has on average been $19,391,750,000.00.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Baidu's P/B ratio of 0.1 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Communication Services sector was 2.62 as of the third quarter of 2022.
Baidu is likely fairly valued at today's prices because it has a negative P/E ratio, an exceptionally low P/B ratio, and a steady stream of strong cash flows with a downwards trend. The stock has mixed growth indicators because of its consistently strong gross margins with a stable trend, and an inflated PEG ratio. We hope this preliminary analysis will encourage you to do your own research into BIDU's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
