Baidu Inc - ADR

##Symbol##BIDU

Baidu (sometimes referred to as China's Google) has increased revenue (ttm) for 25 consecutive quarters and now boasts over $8 billion in annual sales. But the major concern for the firm is its operating margin. At its peak, BIDU earned over $2 in revenue for every $1 in operating expense. That revenue number has fallen to $1.20 for every $1 in expense.

The net effect is a rather abrupt drop in price to sales, which was ~35 in 2011 and now sits below 10. A valuation premium naturally falls as a company grows from infancy to a mega cap, but make no mistake, the operating margin decline has had a non-trivial impact on valuation.

Much like its Chinese mega cap counterpart Alibaba, BIDU is now faced with generating substantial revenue outside of China and that means its competing with not just Google for search, but also with Google and Apple in the connected car services segment. The potential for growth in all areas is massive given how regionally hyper focused the revenue stream is, but the competition is equally massive.

But there's one thing the inesting world may be overlooking that's quite bullish for BIDU, and we'll discuss that in the conclusion.

Technicals | Support: $189.18 | Resistance: $250.34
BIDU has a four bull (high rated) technical rating because its trading above its 10- and 50-day moving averages, but below its 200- day moving average.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.

EARNINGS ESTIMATES
Earnings Date	EPS	Revenue (Mean)	Revenue (Median)	Last Quarter (Actual)
2015-07-23	$1.77	$2,571.0 M	$2,577.5 M	$2,052.5 M	Provided by ZACKS

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Revenue (TTM US$ Millions)	8,433	5,706	3,863
Operating Margin (QTR)	1.204	1.33	1.59	FALLING
Net Income (TTM US$ Millions)	2,113	1,771	1,708	RISING
Levered Free Cash Flow (TTM US$ Millions)	1,595
Research and Development (US$ Millions)	369	205	130	RISING
Research and Development Expense/Revenue	0.180	0.134	0.136	RISING

Stock Returns and Chart

BIDU is up +3.7% over the last three months and down -5.9% over the last six months. The stock price is up +18.2% over the last year. I reprise the technical rating, which is four "bulls" because the stock is trading above the short-term (10 day) and medium-=term (50-day) moving averages, so we're looking at a stock with strong fundamentals and decent technicals.

Before we dig into the fundamental trends that drive the rating, let's look at a stock chart with regression channel and 10-day momentum (on the bottom).

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Now let's examine the visualizations of the critical financial measures.

METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Revenue (TTM US$ Millions)	8,433	5,706	3,863

BIDU may have the prettiest revenue chart in all of financial markets. It rivals that of Netflix and Amazon. Even more impressive, it's not really doing much outside of China (yet). While growth outside of China seems compelling, don't forget the road that Alibaba just took, which was to broaden its offerings in China (video streaming / Netflix competitor) while also pursuing international growth. Look for BIDU to be creative and do something to grow business in its core region (China). If that happens, we could see a sharp stock reaction.

Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (in this case over 25 straight quarters).

BIDU grew revenue by 47.8% year-over-year. Any number over 20% has an added impact on the fundamental (star) rating.

What do all these numbers mean?
BIDU's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.


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METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Operating Revenues/Operating Expense	1.204	1.33	1.59	FALLING

If BIDu wins the prize for prettiest revenue chart, then it may very well also win the prize for ugliest operating margin chart. Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter BIDU showed a ratio of 1.20, but believe it or not, back in 2011 BIDU actually showed an operating margin of over 2.0. That's a HUGE number. For context, recall that Facebook's operating revenue over operating expense peaked at 1.74 (which is also huge).

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 1.33. In the last year we can see operating margins are decreasing but are greater than 1.0 for the most recent period.

BIDU's fundamental rating was affected from the operating margin numbers in two ways:
1. The current value is above 1.0 (the firm generates an operating profit).
2. The one-year change was negative (lowers the rating a little bit).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.


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METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Net Income (TTM US$ Millions)	2,113	1,771	1,708	RISING

This is an interesting metric for BIDU. First and foremost, the firm makes a lot of money. This isn't a "growth" story where profits come later, rather it's a growth story where [profits are already present to the tune of $2.1 billion in the trailing-twelve-months. But (there's always a but), the last two quarterly results have seen rather sharp drops. Now, a part of that is a natural cyclicality in earnings (which we can see in the chart), but, BIDU's most recent quarter showed its lowest net income since June of 2013.

Still, net income over the trailing twelve months (TTM) for BIDU is rising, with a year-over-year increase of 19.3%.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Check out that gold line drop.


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METRIC	CURRENT	1YR AGO	2YR AGO	DIRECTION
Research and Development (US$ Millions)	369	205	130	RISING

Of all the interesting things happening at BIDU, R&D may be at the top. The firm spends like it means it. Research and Development (US$ Millions) in the most recent quarter for BIDU was $369 million which is 80% from last year's value of $205 million. That's not a typo. Further, we can see that R&D today relative to two-years ago is 183% higher.

Still not impressed? Try this. R&D spent per dollar of revenue has increased from $0.13 to now $0.18 in just a year. The net results is a firm who has seen R&D rise from $40 million in 2012 to now nearly $370 million. I always give the caveat that technology firms have a nasty habit of putting stock based compensation into R&D (I have no idea why), but in any case, the trend is rather obvious and rather abrupt. BIDU is spending.

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and R&D per dollar of revenue in the orange line. note that both are exploding higher.


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Tale of the Tape

In our final visualization, we take a look at a cool head-to-head comparison of Google and BIDU across nine critical fundamental measures in one image


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Across the top row we can see the scale of Google. We're talking GIGANTIC. It towers over BIDU in terms of revenue, earnings and revenue per employee.

Across the second row we can see margins, and here's where BIDU looks quite tasty. BIDU has greater gross margins and net income margins while still spending more in R&D per dollar of operating expense than Google.

The final row shows us an even brighter picture for BIDU. The firm is growing revenue and earnings MUCH faster than Google and for that it receives a substantially higher price to sales ratio. In English, every dollar of revenue for BIDu yields nearly $9 in market cap, whereas every dollar in revenue for Google yields just $5.50 in market cap. That's the price of growth.

Summary
BIDU is a remarkable company, It's growing like a small cap but is a tech mega cap. It's been mostly isolated to China but continues to grow. The margin pressure may be coming from application development and those expenses (see R&D) could (should) be capitalized. That means all that R&D we see which is hurting operating margins could turn into even larger growth and a re-expansion of margins.

BIDU now invests in online video and online travel and many feel those two areas may generate margin "pain" in 2015, but profits in the years to follow. The fact that BIDUu is reinvesting in China (like it's other tech brother Alibaba) could be a bullish sign for the firm. Its online video business, which is in a very crowded segment in China, has grown to over 5 million subsribers and realized something on the order of 700% year-over-year growth. The investment thesis that surrounds growth inside China, like for Alibaba, is a very compelling one.