Today I sold my stake in Chinese search giant Baidu. The reason behind it is straight and easy: Valuation exceeded my Price Target of around USD 255 per share. In my opinion a margin of safety is not given at this price. Further share price appreciation hence will be based on shaky growth assumptions, that I am not willing to pay up for. (especially in a market where European Junk-bonds yield lower than 10-year treasuries, a levered tec-fund can raise capital at 7% and the only justification to hold on to stocks is the fear of missing out on yet another rallye)
The Investment in Baidu yielded a 43% CAGR with only very little risk of permanent impairment of capital.
I have been interested in Baidu for quite a while and today decided to open a position in the company by buying 6 shares at a price of USD 163. I will increase the position when prices turn more favorable.
On SeekingAlpha I have outlined why shares are a buy at current levels in detail. You´ll find the pitch including my valuation model here:
For all the folks in a rush, here´s a fast track introduction as to why Baidu may be suitable for a value investor´s portfolio despite being an internet company and Chinese:
- Sum of the parts valuation results in value of USD 255 per ADR
- or 60% upside until end of FY2017
- Baidu search is significantly undervalued trading at 11x FY2017 after tax profits while growing at a > 20% clip
- Comparable businesses command multiples in excess of 20x profits
- High search margins are buried under large investments into O2O and iQyi
- Sale of online-to-offline businesses and Chinese Netflix pendant iQyi will reveal true earnings potential or provide upside optionality if turning profitable.
Here´s a brief update on what Chinese think of the company and its services. Headline here is that Baidu is unloved but there is no alternative for it, which will ensure growing profits for years to come.
I am currently long Baidu (BIDU)