By now, mobile troubles, the Qihoo 360 Technology Co Ltd (NYSE:QIHU) threat, and perhaps the Youku Tudou Inc (ADR) (NYSE:YOKU) threat may put you off from buying Baidu.com, Inc. (ADR) (NASDAQ:BIDU). However, you needn’t worry about such complexities. That’s how Mr. Market makes such stupid, short-term decisions. All you need to invest confidently in Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is simple reason.
Baidu is the cheapest it’s been in five years
Here’s perhaps the biggest reason it’s the right time to buy Baidu:
Now, the P/E ratio isn’t the perfect metric to measure value — no metric is — so let’s not get caught up in the details. What I like to use the P/E for, however, is as a measure of what the market expects of Baidu.
Given that the company’s P/E of 18 is lower than that of tertiary Chinese search players such as Google Inc (NASDAQ:GOOG) and Sohu.com Inc (NASDAQ:SOHU) — even as Baidu.com, Inc. (ADR) (NASDAQ:BIDU) dominates with 70% market share — it’s clear that Baidu has fallen out of favor with manic-depressive Mr. Market.
So if you’ve had Baidu on your watchlist, and if you’ve developed a sound, simple thesis for investing in Baidu, stop reading this article. What are you waiting for?
Understandably, you’re wary. I mean, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) trades at a 52-week low of $85, and the company could go lower.
Three reasons Baidu could go lower
(Note: These are the three biggest problems for Baidu as I see them. I’ve borrowed heavily from fellow Fools John Reeves and Pamela Peerce-Landers’ phenomenal slideshow on the Bull vs. Bear Case for Baidu.)
The first and biggest reason Mr. Market thinks so little of Baidu is that the economics of mobile search aren’t great. Understandably, mobile advertising isn’t as lucrative as desktop search, where Baidu can run bigger ads, as well as more ads per page (up to eight, versus two on mobile, to be exact), and thus charge more per ad. Moreover, Baidu already sees 39% of its traffic, but gets only 2% of its revenue, from mobile devices. And as mobile usage is set to grow at 100% per year, Credit Suisse notes that PC Internet will see only single-digit growth.
Second, Mr. Market thinks Qihoo is a real threat to Baidu.com, Inc. (ADR) (NASDAQ:BIDU). Just look at its outrageous P/E of 76! Of course, those expectations are, in many ways, well deserved. Since launching a search engine last summer, the antivirus maker has shot its way up to become China’s No. 2 provider in search; it now commands 12% of the search market. Furthermore, Qihoo has made key partnerships with Google to bolster its ad platform. Meanwhile, there are rumors that Qihoo may soon partner with Sohu’s search engine, Sogou.com; together, they would comprise 20% of the search market. Suffice it to say the market thinks that Qihoo is the snowball that may soon become an avalanche — taking down Baidu with it.
Third, Mr. Market is scared of Baidu’s other advertising competitors — namely, Youku Tudou Inc (ADR) (NYSE:YOKU), the “YouTube of China.” Currently, Youku’s ad revenue is projected to grow faster than Baidu’s; Youku Tudou Inc (ADR) (NYSE:YOKU) also commands greater traffic, as Chinese users like short, user-generated content to Baidu’s iQiyi’s long videos.