Baidu (BIDU) Takes a Hit as Sluggish Margins Offset Positive Growth Prospects

Software company Baidu stunned Wall Street today as it plummeted to $143.48, marking a -4.1% change. BIDU is -20.1% below its average analyst target price of $179.57, which implies there is more upside for the stock.

As such, the average analyst rates it at buy.

Baidu's trailing 12 month P/E ratio is 27.3, based on its trailing EPS of $5.25. The company has a forward P/E ratio of 13.0 according to its forward EPS of $11.05 -- 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).

BIDU’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.

When we perform the calculation for Baidu, we obtain a PEG ratio of 55.2, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course 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 ($ 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 (lower numbers indicating more stability): 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.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the first quarter of 2023, the mean P/B ratio of the technology sector is 6.23, compared to the S&P 500 average of 2.95. 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 0.22 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock.

Baidu is likely undervalued because it has an average P/E ratio, an exceptionally low P/B ratio, and a steady stream of strong cash flows with a flat trend. The stock has poor growth indicators because of its weak operating margins with a positive growth rate, and an inflated PEG ratio. We hope this analysis will inspire you to do your own research into BIDU's fundamental values -- especially their trends over time.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.