For the sake of not repeating the investment thesis on Baidu (BIDU) in this article, we’ve provided the link to ‘Baidu’s Internet Presence in China Is Phenomenal’ for background. Also, please don’t forget to access the company’s 16-page report, if desired.
On Thursday, the Chinese Internet search giant reported excellent second-quarter results. Total revenue surged an impressive 58.5% from the same period a year ago, while operating profit advanced 22.5%. Baidu has a clear lead in mobile in China, with mobile revenue now as much as 30% of total revenue. Net income attributable to Baidu leapt more than 34%, to $571.7 million. The growth rates were fantastic, and we think Baidu is now trading more consistently with its blockbuster performance than previously. In quarters past, Baidu would tend to sell off on such results. The market, in our view, has finally accepted that Baidu has significantly more earnings power than had been embedded in its share price just a number of months ago—earnings growth potential is far greater than the 20%+ growth rate reported in the second quarter (especially once investments slow). The resetting of earnings-growth expectations by the market is largely responsible for the ~10% share-price pop during the trading session Friday.
Unfortunately, or fortunately depending on how you look at it, Baidu has now practically converged to our $227 per share fair value estimate. Though we tend to let the winners run in the Best Ideas portfolio, a core component of the Valuentum process, we’ll likely be taking profits in the company early next week (likely on July 28, 29). The reason is not that we don’t like Baidu’s fundamentals or its fantastic growth prospects, but more that, in the event we do have a major market sell-off, the firm would likely see its share price punished more than average (it has a market beta significantly more than 1). We trust members are happy with the company’s performance in the Best Ideas portfolio. Shares were added to the portfolio August 1, 2013, at $133.60 each. Please expect an email transaction alert regarding this matter early next week.
Interested in dividend growth ideas, access our Dividend Growth portfolio, or inquire about the Dividend100 publication.