3 Reasons Baidu Stock Will Bounce Back in 2017
Image source: Baidu.
It hasn't been a winning year forBaidu(NASDAQ: BIDU)shareholders. Shares of China's leading search engine are trading 13% lower in 2016, a rare down year for one of the market's biggest winners since going public at a split-adjusted $2.70 in 2005.
At least one Wall Street pro doesn't see things getting better in the near term. Cantor analystNaoshi Nema initiated coverage of Baidu with an underweight rating this morning, slapping a $126 price target that suggests another 24% in downside from here. He fears that Baidu will lose market share in mobile, and newer businesses including streaming video, delivery services, and a group-buying hub will continue sting the bottom line.
That's just one opinion, of course. Just last week we hadDeutsche Bank analyst Alan Hellawell boost his price targetfrom $173 to $194. Let's take a look at some of the reasons why Baidu stock may head higher -- not lower -- in the year ahead.
1. Comparisons will get easier by next summer
Revenue growth has decelerated sharply lately, and the two major culprits are the deconsolidation of its stake inQunar's (NASDAQ: QUNR) online travel business and regulators' springtime move to crack down on health-related advertising on Baidu's search engine.
The move at Qunar was a one-time event. The regulatory curbsare leaving a dent. However, in both cases we're talking about year-over-year comparisons that will be easier once they're on an apples-to-apples basis starting in midway through the second quarter of next year.
2. Money-losing businesses may start to pay off
Baidu had the framework of a deal to take iQiyi private earlier this year. It's a transaction that would've resulted in roughly $2 billion going Baidu's way for its majority stake in the video-streaming offering. Activists got loud, arguing that iQiyi was worth more than that, and the deal fell apart.
The losses at iQiyi are one of the reasons why Nema is bearish, and it's painful to see how close Baidu was from turning a profit-slurping business into a 10-figure payday. These opportunities will come around again, and Baidu may think twice before yielding to activist pressure next time.
3. The valuation is more reasonable
Baidu's bottom line has taken a hit in 2016, but analysts see it making it all back and then some come 2017. The stock now trades for less than 30 times next year's projected earnings. That may not seem cheap, but it's more than reasonable for a stock that has historically traded at lofty market multiples.
If Baidu is able to improve on its margins -- as many analysts believe will happen in 2017 -- or if it's able to unload some of its money-losing businesses, the company's profits may be higher and its earnings multiples clock in even lower.
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Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.