Baidu.com, Inc. (ADR) (BIDU): Shares Are Just Too Cheap

Valuations for internet technology companies are literally all over the place. On one end of the spectrum sits LinkedIn Corp (NYSE:LNKD) and Amazon.com, Inc. (NASDAQ:AMZN)—fast growing firms with sky-high PE multiples and tremendous credit given to the long run. On the other end, we have Apple Inc. (NASDAQ:AAPL) generating fantastic amounts of free cash flow, and trading with single-digit forward PE multiples. Chinese search giant Baidu.com, Inc. (ADR) (NASDAQ:BIDU) falls closer to Apple Inc. (NASDAQ:AAPL), and we at Valuentum think shares look incredibly cheap at current levels. Let’s take a closer look at the search giant.

Valuation

Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s valuation on a discounted cash flow basis looks extremely reasonable. We estimate shares to be worth $108-$200, with $154 representing our mid-point. This equates to roughly 83% upside from current levels! Our valuation includes a relatively steep year-over-year decline in operating margins, as well as a material slowdown in earnings growth.

On a relative valuation, Baidu trades at a discount to peers like Facebook Inc (NASDAQ:FB) and LinkedIn Corp (NYSE:LNKD), which seems justifiable based on the shifts toward mobile and social advertising. However, the Chinese search giant also trades at a discount to Google Inc (NASDAQ:GOOG) and Yahoo! Inc. (NASDAQ:YHOO). Google continues to grow at a brisk rate, and is one of Valuentum’s Best Ideas Newsletter constituents, but we think the future growth of Baidu looks far more compelling than Yahoo.

China’s Google

Baidu.com, Inc. (ADR) (NASDAQ:BIDU) holds a market leading position in search, and many have dubbed it “China’s Google.” Although Google’s proven itself to be a formidable foe in many global search markets, the Chinese government banned Google over censorship issues, ensuring Baidu faces relatively little competition. Google Inc (NASDAQ:GOOG) accounts for less than 5% of search market share in China. Qihoo 360 Technology Co Ltd (NYSE:QIHU), a software security and search competitor, as well as Sougu, Soso, Bing, and Yahoo! Inc. (NASDAQ:YHOO) all hold less than 10% market share.