Good Luck Bret in shorting BIDU:
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10 Reasons to Avoid Baidu.com 23 comments
by: Bret Jensen June 02, 2010 |
Share0 Baidu.com (BIDU) has an amazing run over the last year. It is up not quite 300% in the last year and 80% for 2010. A large of part of this year’s run up has been driven by a better expected 1st quarter earnings report, a ten-for-one stock split, and Google’s (GOOG) decision to abandon mainland China after it had some of it users email accounts hacked from inside the country.
BIDU’s skyrocketing appreciation has come despite the Chinese bourse entering a bear market since the first of the year. Given the rapid appreciation of the stock and a valuation that is stretched by any metric, despite its stellar growth record; I would take this opportunity to sell any appreciated shares and wait for pullback to pick up at a lower price if you are a long term believer in this company’s prospects. For investors with more risk appetite, I think this could be great short opportunity given what is happening in markets all across the globe.
10 reasons to avoid BIDU at this price:
1. Stock is priced at more than 35 times trailing revenues.
2. Management turnover: COO and CIO left in January.
3. Stock is priced at almost 100 times trailing earnings.
4. Company does not seem to be investing enough in its future. Capital expenditures and investments fell both in 2008 and 2009 in both relative and absolute terms from the previous year. While this helps earnings and operating cash flow, it does not bode well for future product innovation.
5. Stock is priced at 75 times operating cash flow.
6. Much of the run up was fueled by Google’s departure from mainland China. It was projected that BIDU would take most of Google’s 35% market share to add to its leading 60% market share. However, Google still has a presence in Hong Kong and market share erosion may not happen to the extent priced into the stock. In latest quarterly earnings, BIDU had only moved up its market share to 65.4%.
7. Stock is priced at 33 times book value.
8. BIDU competitors are not standing still. Google still has a presence via Hong Kong, Netease has entered partnership with Microsoft, Softbank is entering market via Japan, SINA and SOHU could improve their products, and Tencent could entered search market at some point.
9. The divergence from what is happening in the overall Chinese market can not last forever.
10. Being a search engine in a communist country that heavily censors the internet has its own degree of political risk that probably isn’t priced into the stock price at these levels.
At these levels, I think Sohu.com (SOHU) is a much better way to invest in the growth of the Chinese internet. Although its projected revenue growth of 20% next year does not compare to BIDU’s 60%, its valuation is much more attractive especially after losing value since first of year along with most of the rest of the Chinese Index, and its susceptibility to a major pullback is much less. It is trading at 10 times next year’s earning, three times revenues, and seven times operating cash flow. It also has 35% of its market cap in net cash, compared to BIDU’s 3%.
Disclosure: Short BIDUAbout the author: Bret Jensen Chief Investment Officer (CIO) for S.A.M (Simplified Asset Management), a long/short hedge fund based on Miami, Florida. Responsible for portfolio management and investment selection decisions. Fund was in top five percent of long/short funds for total return in first full year(2009) ranked... More |
