Competitors and future investment
The picture of Baidu.com, Inc. (ADR) (NASDAQ:BIDU) comes into greater focus as we move forward and look at the debt/equity ratio. This measure is useful in determining to what extent a company is financing its growth through the use of debt. For Baidu, this number is 0.4 (ttm). As a result, we see a company that faces a lower burden of meeting heavy debt obligations. This, in turn, represents lower risk, relative to others in the technology sector that represent higher debt/equity ratios. Other competitors, such as Tencent Holdings and Sohu.com Inc (NASDAQ:SOHU), have comparable ratios of 0.2 and 0.1. For those who are unaware, Tencent provides services related to internet, mobile and telecommunications, and other online value-added services in China. While the company is relatively unknown in the U.S., it is well-known in China as has been rapidly expanding over the last few years. Sohu, meanwhile, provides online services in China, and is most well known for sohu.com, which provides news, commentary entertainment, and more. Both Tencent and Sohu.com Inc (NASDAQ:SOHU) are near 52-week highs and have strong outlooks moving forward, as they have plenty of room to grow and continue to increase revenues. However, despite these strong numbers and overall attractive companies, neither of these companies can boast owning 73% of the Chinese search engine market and a valuable growing relationship with Intel Corporation (NASDAQ:INTC); this fact alone gives Baidu.com, Inc. (ADR) (NASDAQ:BIDU) an advantage.
Partnerships and expansion like this are only possible through free cash flow. This measurement is a more reliable metric that is extremely difficult to manipulate through clever accounting. Through free cash flow, we can see how Baidu is able to generate cash. The company has seen its free cash flow increase by 56% from 2010 to 2011, and 61% from 2011 to 2012. This gives Baidu incredible opportunity to continue its already aggressive growth through investment in technology. With free cash flow, the company displays its ability not only to generate cash, but also develop other services like Baidu News, Baidu Space, and China’s largest online encyclopedia (by users), Baidu Encyclopedia. The expansion of technology is among the most critical for a company in this web sphere.
Finally, the price/earnings to growth, or PEG ratio, of Baidu.com, Inc. (ADR) (NASDAQ:BIDU) (0.55) indicates the stock is undervalued. To bring greater meaning to the price/earnings-to-growth ratio, consider the results of a brief study conducted by Motley Fool researcher Joseph Khattab, who calculated the PEG ratio for 1,316 companies. He discovered that 92% of companies with a PEG ratio of less than one enjoyed returns greater than the market for three years.
Final thoughts
By looking at Baidu from these five different vantage points, we can construct a multi-dimensional view of the current and projected value of a company that is poised to deliver exceptional returns in the future. The recent share price decline is not something to be fearful of, but instead a great sign of opportunity. Additionally, Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s large market share advantage over competitors such as Tencent and Sohu gives it an immediate leg up, and to many, this fact alone makes Baidu a better investment. Plus, shareholders can realize even greater value by purchasing at a discount and becoming owners of an already-valuable company.
The article Baidu: Why Now Is The Time To Buy originally appeared on Fool.com and is written by Daniel Murray.
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