Baidu (NASDAQ:BIDU), the $57 billion market capitalization Chinese search engine stock listed on the Nasdaq, has fallen due to the Chinese crackdown on large Internet stocks. But BIDU stock might have further to fall. Let’s think this through a bit.
No matter what, one thing is for sure right now. BIDU stock is very cheap. It trades for just 17.5 times the earnings forecast this year and 14 times next year’s earnings. Moreover, its price-to-sales (P/S) multiple is less than 3 times for this year and next. So let’s look into why BIDU stock is so cheap.
Why Baidu Stock Is So Cheap
The market has a lot of fears about Chinese stocks right now, including Baidu. Sometimes it is best to work through your fears and try and imagine what lies on the other side.
One fear, expressed by this typical Fortune article on Chinese stocks, is that the authoritarian Communist one-party state will keep on cracking down further. Their official reason for its campaign is to protect investors, but the market knows it’s probably more about insipient control over Chinese society.
Of course, this should have been expected by rational investors. China does not have the same kind of investor and democratic freedoms as in the U.S. and in the West. Simply put, the Communist Party there can do whatever they feel like. Apparently they felt threatened by the size of a number of companies. So, in this sense, it is a wake-up call.
Another fear, especially with Baidu, is that it will delist from Nasdaq. That is a huge fear that investors have with this search company and was sparked last year by several articles put out by Reuters that the company was actively considering this.
But, in this case, it would not be the end of the world. Shareholders would likely be able to trade their ADRs in a secondary market over the counter. Moreover, they could exchange their ADR shares for ordinary shares and trade them in Hong Kong or Shanghai.
Another issue is whether Baidu can sustain ad growth in the future, or if its non-ad business will make the company’s outlook more volatile. The CEO said he hoped that the non-ad business would be greater than its ad search business.
However, analysts now forecast at least 20.8% sales growth this year to $19.87 billion, according to Refinitiv data published by Yahoo! Finance. And next year, analysts foresee a 15.5% growth rate in sales to $23 billion.
That growth rate for such a large company would normally give a stock a five to 10 times sales multiple. But BIDU stock trades for less than 2.5 times 2022 sales (i.e., $57 billion market cap/$23 b sales = 2.47x).
Where This Leaves BIDU Stock
Analysts believe the stock is deeply undervalued. For example, TipRanks.com reports that analysts have an average price target of $281, or 69% over today’s price. Refinitiv’s data published by Yahoo! Finance reports that 42 analysts have an average target of $308, or 85% over Monday’s closing price of $166.53. Seeking Alpha reports that 36 analysts have an average target of $296.47.
So Wall Street is very bullish on BIDU stock. But it may take some time before the stock reaches these price targets. It certainly won’t happen while the market is scared of Chinese stocks.
But, of course, this is what contrarians like me feed on. The point is to buy when others are scared and selling.
But this technique takes a lot of nerve. You should expect to initially lose money. And you have to average down into your investment over time, especially hoping to find an inflection point. Expect to see the stock fall 20% before it bottoms out. But keep buying. This company is well worth it.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.