One of today's standouts was Baidu, a software company whose shares are up 7.3%, outperforming the Nasdaq by 6.0%. At $144.2, its shares are -19.98% below their average analyst target price of $180.21.
The average analyst rating for the stock is buy. BIDU may have outstripped the S&P 500 index by 6.0% today, but it has lagged behind the index by -21.0% over the last year, returning -4.6%.
Baidu, Inc. offers internet search services in China. The company is a technology company. Valuations in the technology sector are often very high, as investors are willing to overlook gaps in the fundamentals if they believe a company’s innovations can dominate or create new markets.
Baidu's trailing 12 month P/E ratio is 26.8, based on its trailing EPS of $5.39. The company has a forward P/E ratio of 12.9 according to its forward EPS of $11.15 -- which is an estimate of what its earnings will look like in the next quarter. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
Baidu's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.
We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 45.92 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's lofty valuation is not completely justified by its growth levels.
To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on BIDU's margins:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 123,675,000 | 63,935,000 | 48.3 | -0.08 |
| 2021-12-31 | 124,493,000 | 64,314,000 | 48.34 | -0.31 |
| 2020-12-31 | 107,074,000 | 55,158,000 | 48.49 | 16.87 |
| 2019-12-31 | 107,413,000 | 62,850,000 | 41.49 | n/a |
- Average gross margin: 46.7 %
- Average gross margin growth rate: 3.9 %
- Coefficient of variability (higher numbers indicating more instability): 7.4 %
We can see from the above that Baidu business is not strong and its stock is likely not suitable for conservative investors.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Baidu's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 26,170,000 | -8,393,000 | 26,170,000 | 30.06 |
| 2021-12-31 | 20,122,000 | -11,240,000 | 20,122,000 | 6.64 |
| 2020-12-31 | 24,200,000 | -5,331,000 | 18,869,000 | -33.7 |
| 2019-12-31 | 28,458,000 | -19,121,000 | 28,458,000 | n/a |
- Average free cash flow: $23.4 Billion
- Average free cash flow growth rate: -2.1 %
- Coefficient of variability (the lower the better): 19.8 %
Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, BIDU is in a position to do either -- which can encourage more investors to place their capital in the company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the first quarter of 2023, the average P/B ratio for technology companies is 6.23. In contrast, the average P/B ratio of the S&P 500 is 2.95. Baidu's P/B ratio of 0.22 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock.
Since it has an average P/E ratio, an exceptionally low P/B ratio, a steady stream of strong cash flows on a flat trend, Baidu is likely undervalued at today's prices. The company has poor growth indicators because of an inflated PEG ratio and weak operating margins with a positive growth rate. We hope you enjoyed this basic overview of BIDU's fundamentals. Make sure to check the numbers for yourself, especially focusing on their trends over the last few years.
