December 7, 2011 | In: Technology

Is BIDU a Good Stock to Buy?

Those who are regular readers on my website probably know by now that I’m not a big fan of Chinese stocks, and that they scare me. Now BIDU is a Chinese stock, am I afraid of it? And is BIDU a good stock to buy?

To answer this question, let us first understand what is BIDU. BIDU is the stock of Baidu, which is China’s answer to Google. Whitg the exception of the logo and the Chinese language, Baidu is a copycat of Google’s 2006 interface. Baidu is the most visited website in China and is the 5th most visited website in the whole world (according to Alexa).

Baidu’s main visitors are Chinese, and the absolute majority of visits originate from China. Baidu makes money by serving ads (same as Google).

So, technically, Baidu should be evaluated the same way as Google is evaluated by the market, which means that Baidu should be trading at a P/E ratio similar to that of Google, which is 21.12. In order to give Baidu some leeway, let us assume that Google should be trading at a P/E ratio of 25. But Baidu is currently trading at an unsustainable P/E ratio of 50, so this means that it should be valued at half its current price, which in its turn means that Baidu’s market capitalization should be $22 billion, which means that technically, BIDU should be worth no more than $65.

So, $65 is what BIDU is really worth during good times. But what about bad times? We all know that China will face a slowdown in the economy next year, and most likely will face a credit crunch (because of the current housing bubble) and subsequently a recession next year as well (or, at most, in 2013). So, how much will BIDU be worth in bad times?

Well, let’s look at how Google did in bad times in order to understand what will happen to BIDU next year. GOOG is currently trading at $620, but it reached a low of around $250 and it was hovering around the $500 level for almost a year after the recession. So, when taking that into consideration, we can deduce that BIDU will be trading at a minimum of $26 in the beginning of the recession, and around $52 a year after the recession.

Now, as you can see from the above, BIDU is overpriced by almost 100% during the good times, and has the potential of dropping just a bit more than $100 (or almost 80% of its current value) if a recession hits China. So, what do you think? Is BIDU a good stock to buy? My answer is obviously no (and yes, it does scare me), it’s actually one of the worst stocks to buy at the moment.

BIDU, by the way, reminds of NFLX a lot: overvalued for no reason other than the investors really love it. Take a look at NFLX now. Sooner or later the business model and the financials of the company will prevail (over sentiments) when it comes to its assessment by the market and the investors.

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