Baidu

Baidu Stock: Passing the Auditor’s Test (NASDAQ: BIDU)

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Chinese technology companies, such as Baidu (NASDAQ: BIDU), had good news to end the week. The SEC and the Public Company Accounting Oversight Board (PCAOB) have signed a preliminary agreement with Chinese regulators, a positive sign for Chinese stocks will not be delisted. My investment thesis remains ultra bullish on Baidu laden with money and technological inventions in promising new areas.

Fears of radiation are reduced

The biggest fear of owning Chinese tech stocks Baidu and Alibaba (BABA) was that the SEC would force these companies to pull out of US exchanges. The Holding Foreign Companies Accountable Act (HFCAA) became law on December 18, 2020 requiring publicly traded foreign stocks to have an audit performed by reliable accounting firms based on the PCAOB determination.

The SEC, PCAOB and Chinese regulators have reached an agreement that US authorities will have sole discretion over audit review. The preliminary agreement is only a first step with a crucial moment in mid-September, the PCAOB planning to have inspectors on the ground in mainland China and Hong Kong.

China Agreement

Source: PACOB

The proof will certainly be in the pudding of whether Chinese authorities will indeed follow through on allowing inspectors to examine financial documents and audit reports from Chinese companies, as well as interview personnel associated with the audits. The market shouldn’t be surprised if the deal runs into trouble after Chinese regulators agreed in theory but not in practice.

The risk for Baidu and other Chinese stocks is that after a three-year period of failed audits, the stocks could be delisted. Baidu has already passed the one-year milestone, but the company still has plenty of time to work with regulators to find a solution for US shareholders.

AI Boost

Due to the covid lockdowns in China, the stock is difficult to value at this time. Full aspects of the business are not known with reduced results in the first quarter of 2022 and the next report for the second quarter of 2022 will be published before the market opens on August 30.

Baidu recently released first-quarter results that beat analysts’ expectations, but the Chinese tech giant only posted 1% revenue growth. The company continued to deliver massive non-advertising revenue growth, with non-marketing activity increasing 35% and AI Cloud jumping 45% year-over-year.

Apollo Go continues to gain additional regulatory approvals for expanded services, including the launch of driverless ride services in an area of ​​Beijing in late April. The company followed that approval with recent approvals to offer fully driverless robotaxi services in Wuhan and Chongqing.

Between AI Cloud and robotaxis, Baidu remains in massive growth mode while the online marketing business (internet search) remains a growth opportunity, albeit at slower growth rates. As the AI ​​business grows in the coming years, Baidu will become an exceptionally cheap stock.

The stock trades at just 15 times 2023 earnings estimates and, understandably, the EV is well below with a net cash balance of nearly $18 billion. Compared to Alphabet (GOOG, GOOGL), the Chinese company is trading at a slightly lower forward EV/EBITDA multiple at just 11x.

Chart
Data by YCharts

Baidu isn’t as cheap now with some cuts in recent earnings expectations due to Chinese lockdowns. Either way, Alphabet and Baidu are exceptionally cheap stocks, with earnings growth alone looking to outpace current valuation multiples. Both companies should be able to exceed these growth rates on net income. Additionally, Baidu has $18 billion in net cash to continue buying back ultra-cheap stocks despite strong growth prospects when China fully ends covid restrictions and once again focuses on growing the economy.

The company reports ahead of the August 30 open, with analysts predicting a major hit to Q2’22 revenue with a target of a 12.5% ​​drop to $4.24 billion. Analysts forecast a further decline of 5.3% during the third quarter of 2022, to $4.74 billion, as China continues to work in and out of covid restrictions this quarter.

Carry

The key investor takeaway is that Baidu is trading just 11x EV/EBITDA targets in what is currently tough economic times as the CCP is still battling a virus that the US has mostly surpassed. The stock becomes much cheaper as China fully reopens and earnings expectations rise, while the recent agreement between financial regulators in the United States and China helps reduce the risk of an ultimate delisting from the ‘stock.

Investors should continue to stock up on the leading Chinese tech company while the stock is still cheap below $150.