In case you didn’t get the memo, Chinese stocks are generally out of favor right now. Among the casualties is Baidu (NASDAQ:BIDU), China’s popular Internet search engine. To put it simply, the fear of regulatory crackdowns has put negative pressure on BIDU stock.
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The biggest scapegoat so far has been ride-hailing company Didi Global (NYSE:DIDI), which Chinese regulators have targeted for a cybersecurity review.
The Cyberspace Administration of China alleged that Didi illegally collected its users’ data. It’s a serious accusation, and investors’ anxiety is understandable.
Yet, this anxiety needn’t be directed at all Chinese companies and their stocks. If anything, informed investors should be chomping at the bit right now as the Baidu beatdown is a severe overreaction.
A Closer Look at BIDU Stock
If you had asked me about BIDU stock in February of this year, I probably would have recommended waiting for lower prices before taking a long position.
So, now we have lower prices. The Baidu bulls ran the share price up to a 52-week high of $354.82 on Feb. 19, but the ascent was too steep and a retracement was almost inevitable.
There’s a lesson to be learned here: price chasers get punished (not always, but often). Thus, after topping out, BIDU stock embarked on a multi-month slide that put some unfortunate investors into the red.
As of July 22, the share price was hovering around $178 and much of the chatter on social media was still bearish.
But for the skeptics and the doubters, I have a counter-argument.
At the moment, Baidu’s trailing 12-month price-to-earnings ratio is 8.28. That’s absurdly low for a tech giant nowadays.
Frankly, some of today’s tech companies don’t even have P/E ratios because they don’t have earnings. That’s not the case with Baidu.
Big Beatdown on Big Data
So, what’s all of the hubbub about, anyhow? Why has the sentiment surrounding Chinese stocks been so negative lately?
It’s hard to know what China’s regulators are thinking, since they’re so unpredictable. For the time being, though, it appears that they just want to posture and flex their muscles.
Again, the current target is Didi. The government, reportedly, is considering an escalation of penalties from fines to a de-listing of the stock.
Bear in mind that DIDI stock just debuted for public trading on June 30. Hence, there’s an existential threat to the company and the stock.
In contrast, BIUD stock has been around for quite a while and isn’t likely to vanish anytime soon.
Granted, Chinese companies related to Big Data may continue to feel the heat. Supposedly, the State Council said in a recent statement that it plans to tighten restrictions on cross-border data flows and security.
Still Strong, by the Numbers
With the Chinese government flexing and attacking, it’s easy to ignore the data which shows that Baidu is prospering.
The most recent fiscal/fundamental data (from the first quarter) should provide comfort to weary and wary investors:
Revenue from Baidu Core totaled 20.5 billion RMB ($3.13 billion), increasing 34% on a year-over-year basis.
Non-marketing revenue was particularly strong, at RMB 4.2 billion ($646 million). This represents a 70% year-over-year increase, and was driven by cloud and other services.
Online marketing revenue came to RMB 16.3 billion ($2.48 billion), exhibiting a 27% year-over-year improvement.
Baidu App’s monthly active users reached 558 million, and daily-logged-in users exceeded 75% in March 2021.
BJH publisher accounts grew 40% year-over-year, reaching 4.2 million.
The next quarterly update will likely happen in August. And if those numbers are strong, the skeptics will be hard-pressed to build a bear case against Baidu.
The Bottom Line
It’s not psychologically easy to buy stocks when the prevailing sentiment is negative.
Yet, that’s how contrarians make money.
So, if you agree that the fear and doubt surrounding Baidu will pass – and that it was grossly overstated in the first place – then a long position in the stock isn’t a bad idea at all.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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