(NASDAQ: BIDU) - collab.its.virginia.edu · Myth: Baidu is Overvalued Overview Mispercep)on. Thesis.Points. Catalysts/Risks. VAR Recommendaon.. High.P/E. Overvalued?. NO! Continued

M c I n t i r e I n v e s t m e n t I n s t i t u t e

McIntire Investment Institute At the University of Virginia

Prepared by David Pastore| Nov 10, 2011

(NASDAQ: BIDU)

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Recommenda)on/Ques)ons    

Value  Added  Research  (VAR)  

Risks/Catalysts  

Thesis  Points  

Mispercep)ons  

Business  and  Stock  Overview  

2

Agenda  

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Founded  January  18,  2000  by  Robin  Li  

Largest  Search  Engine  in  China  

Also  operates  in  Japan  

Produces  Revenue  through  Ads  

57  other  search  services  

3

Business  Overview  

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

M c I n t i r e I n v e s t m e n t I n s t i t u t e 4

Mispercep)ons  Overview   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

Users  

Customers  

Baidu  Union  Members  

Serves 3 types of Online Participants

• Unique Pay for Placement (P4P) performance based marketing platform for its customers that is designed to effectively reach relevant users

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Share Price (Nov 9): 141.94 52-week Range: 94.33-165.96

Market Capitalization: 49.54B Avg Volume(3m): 9,754,770

P/E: 54.76 Forward P/E (fye  Dec  31,  2012): 30.13

EPS: 2.59 Short Ratio: .6

5

Stock Overview

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

M c I n t i r e I n v e s t m e n t I n s t i t u t e 6

Myth: Google Dominates the Chinese Search Market

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

M c I n t i r e I n v e s t m e n t I n s t i t u t e 7

Myth: Baidu is Overvalued

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

High  P/E   Overvalued?  

NO! Continued and Sustainable Earnings make Baidu an Undervalued Stock

M c I n t i r e I n v e s t m e n t I n s t i t u t e 8

Myth: Baidu is Overvalued

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

Increased Earnings per Share = lower P/E

M c I n t i r e I n v e s t m e n t I n s t i t u t e 9

Thesis  Points  

M c I n t i r e I n v e s t m e n t I n s t i t u t e

•  China has largest market – Currently over 450 million

internet users – By 2013 expected users will

exceed 700 million

•  Only 35% have Internet Access – Plenty of room for growth

10

Enormous Growth Potential

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

M c I n t i r e I n v e s t m e n t I n s t i t u t e 11

China vs. U.S.

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

M c I n t i r e I n v e s t m e n t I n s t i t u t e 12

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

ARPU Growth

M c I n t i r e I n v e s t m e n t I n s t i t u t e 13

Baidu Continues to Innovate

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

• Offers 57 extra services •  Following success of Google and Yahoo with Baidu Map & Baidu Knows •  Baidu Forum •  Also offer games, music, and online tv

M c I n t i r e I n v e s t m e n t I n s t i t u t e 14

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

M c I n t i r e I n v e s t m e n t I n s t i t u t e 15

Local Knowledge

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

Keenly  understanding  local  tastes  

Coopera)ng  with  

Government  Censorship  Laws  

Home  Field  

Advantage  

M c I n t i r e I n v e s t m e n t I n s t i t u t e

•  Patents –  Robin Li created and

patented RankDex algorithm

•  Brand Name Recognition –  Baidu already has

customer loyalty

16

Barriers to Entry

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

Baidu  has  few  direct  Compe)tors  

M c I n t i r e I n v e s t m e n t I n s t i t u t e 17

Earnings Growth

Overview   Thesis  Points  Mispercep)ons   Catalysts/Risks   VAR   Recommenda)on    

Consistently  Increasing  Revenue  and  Earnings  

Most  recent  quarter  saw  $654.7  million  of  revenue,  85%  growth  (yoy)  

Last  3  Fiscal  Years,  Revenue  has  increased  over  200%  and  Net  Income  over  300%  

0  

200,000  

400,000  

600,000  

800,000  

1,000,000  

1,200,000  

1,400,000  

1,600,000  

1,800,000  

2008  2009  

2010  

Net  Income   Total  Revenue  

M c I n t i r e I n v e s t m e n t I n s t i t u t e 18

Revenues

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

M c I n t i r e I n v e s t m e n t I n s t i t u t e 19

Risks

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Censorship   Growth  Ceilings  

20

Government Interference

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

M c I n t i r e I n v e s t m e n t I n s t i t u t e 21

Revitalized Competition

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

• Presently Google has mostly withdrawn from China • If they can manage to work around censorship and hacking, may return as a threat • Plenty of Capital to rebound

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Watch List

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

Baidu  is  collabora)ng  with  Facebook  to  improve  their  social  networking-­‐would  rival  leaders  Renren  and  Kaixin0001  

Infla)on  and  con)nued  prosperity  of  China  

Government  Ac)on-­‐new  laws  

M c I n t i r e I n v e s t m e n t I n s t i t u t e

•  User  1    – “Baidu  is  China’s  Google”  – “If  you’re  in  China  or  searching  for  Chinese  sites,  you  use  Baidu”  

•  User  2  – “Baidu  is  basically  Google  but  with  more  features  in  Chinese.  It’s  a  lijle  clujered  at  )mes,  but  that  doesn’t  stop  me  from  using  it.  Everyone  uses  Baidu.”  

23

Value Added Research

Overview   Mispercep)on   Thesis  Points   VAR  Catalysts/Risks   Recommenda)on    

M c I n t i r e I n v e s t m e n t I n s t i t u t e 24

Value Added Research

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

•  User  3  – “It’s  like  Google,  but  in  Chinese  and  it  searches  Chinese  websites…More  and  more  people  are  gelng  used  to  it…I  just  read  an  ar)cle  about  how  they  are  also  branching  out  to  Japan,  Thailand,  Egypt,  and  India.  They  keep  improving.”    

M c I n t i r e I n v e s t m e n t I n s t i t u t e

Thesis points: 1.  Plenty of Room to Grow 2.  Innovative Services 3.  Barriers to Entry 4.  Strong Earnings

Ø  Compelling Long with Potential for Great Returns

25

Summary and Recommendation

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on    

M c I n t i r e I n v e s t m e n t I n s t i t u t e 26

Questions?

Overview   Mispercep)on   Thesis  Points   Catalysts/Risks   VAR   Recommenda)on/Ques)ons