Problem with Google is not the company, but the valuation. What if GOOG revenue stops trending up and plateaus? In the last decade, Google's revenues have doubled every 4 years. Earnings are following a similar trend, too. How much growth is possible from here to the end of their life? I cannot possibly say. If GOOG fell 50% from here, I'd certainly consider it but for this current valuation to be worthwhile, you'd have to hold if for ages and hope that growth persists.
With Baidu, it's a little easier because the valuation is still quite reasonable. Yes, the growth is not as exceptional (revenues double every 8 years and earnings are all over the place) but it's still there. 28x cash flow in 2014 (with a market valuation of double today's!) and 7x cash flow today. The valuation is fair.
The company is better than it was a decade ago but the market just doesn't care. Media haven't really been kind to them either - Baidu’s bet on AI could make or break China’s fallen tech group (ft.com).
To me, the only real risk to this is the unaccountable political risk that could hamper their growth prospects. Even then, if BIDU remain a company only operating in China with no international expansion, I think today's valuation isn't that extreme.
See this comment from the FT article linked above. It's all true and it's why Western investors aren't interested. I agree that a clean-up of the business model would help. They messed up so much in the late 2000's/early 2010's prioritising the wrong strategies and they still have Robin Li as CEO. Maybe I'm wrong for thinking this time will be different.
BIDU like very MANY other Chinese companies is first and foremost a problem of corporate governance and operating backdrop. A short list:
- listcos which are shellco Cayman VIEs, investors own no assets.
- wild gyrations in regulation (BIDU never had an official "blocked keyword" list but suffered greatly in the medical Ads scandals in '17)
- a moth-like attraction to pet projects (Apollo Autonomous Vehicles since '16)
- upside down capital structures (50% of market cap in cash, but raised more in HK to get a political listing with limited liquidity
- failure to manage investments (IQ, YY acquisition, etc.) and simplify P&L
- and the FT has clearly hit a nerve with the husband-wife mgmt team....
BIDU has not done the work Google has to build 20% of sales from outside ads, in Cloud, Devices, Subscriptions, etc. |
