Each of Mr. Market’s concerns is legitimate. These three weaknesses or threats could bring down Baidu’s revenues. Still, I’m not worried. There’s one simple reason I’ve continued to hold on to Baidu, and why I think Mr. Market is overreacting.
One simple, Munger reason to invest in Baidu
One of my favorite sayings from Charlie Munger, Warren Buffett’s right-hand man, originates with Einstein: “Everything should be as simple as possible, and no simpler.”
And when I think of a simple investing thesis for Baidu.com, Inc. (ADR) (NASDAQ:BIDU), this much is clear: Baidu’s core business is search, and it will remain China’s top search dog for some time.
Now, this doesn’t mean I’m neglecting the complexity of China’s search market. Rather, I just don’t believe Mr. Market’s notion that Baidu’s search position is doomed.
First, Baidu has more than a decade of experience in the Chinese search market and can use that knowledge to take on its competitors and solve mobile search.
Second, it will be able to continue to fund both efforts, because its free cash flow continues to spike. And Baidu will continue to rake in that cash for a long time, because Baidu has a natural monopoly on China’s search market, with a 70% share; for comparison, Google commands 67% of the U.S. market. (Accounting for population, that works out to 406 million Chinese Internet users versus 191 million U.S. users.)
Finally, as more Chinese come into the middle class, their discretionary spending will increase. And as spending increases, businesses will turn to search, and to Baidu in particular, because its ad click-through rates are higher than other advertising options.
I hope by now, I’ve hammered the point home: Baidu truly is the “Google of China.” It has such clout and money that it should be able to transform its search business to meet the demands of the broader market.
In essence, buy Baidu.com, Inc. (ADR) (NASDAQ:BIDU) while Mr. Market is short-term crazy. Buy while you still have the chance.
The article Warning: Buy While You Still Have the Chance originally appeared on Fool.com and is written by Kevin Chen.
Fool contributor Kevin Chen owns shares of Baidu. You can follow him on Twitter, at @TMFKang, or on Google+. The Motley Fool recommends Baidu, Google, and Sohu.com and owns shares of Baidu and Google.
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