The Google of China — on Sale
2 mega-trends will be pushing this stock forward in coming years … and you can buy it at a massive sale price today
Investors tend to have it backwards a lot of times …
As Cullen Roche said, “The stock market is the only market where things go on sale and all the customers run out of the store.”
The opposite can also be true, as the below cartoon from Paul Claireaux illustrates.
When prices surge, we often cheer and eagerly open our wallets to buy more shares at increasingly lofty valuations. Yet when prices tumble, we circle the wagons, assume the sky is falling, and refuse to benefit from the market “sale.”
Rationally, this makes little sense, yet investors do it all the time.
Today, there’s a sale going on in a certain world-class company. Shares have been beaten down as investors have turned a blind eye toward the future. You see, this elite company will be benefiting from not one, but two massive trends that are going to reshape the investment markets in the coming years. Yet, at the moment, many investors want nothing to do with it — they’re ignoring the bargain-bin sale that’s going on.
Now, could the selling pressure on it continue for a while? Absolutely. Does it mean we should run away from it and thumb our nose at this opportunity? Absolutely not.
Here’s why, per Matt McCall:
It’s one of the best buying opportunities in the entire stock market today. Period.
So, in today’s Digest let’s reveal what this stock is, as well as the two trends that will drive it higher in coming years. We’ll do this thanks to Matt’s willingness to let me share this company with you. You see, it’s one of his recommendations for his subscribers. But given how strongly Matt believes in this stock, I asked if he’d be willing to let me share it with our broader Digest circulation, and he agreed.
So, enough introduction, let’s jump in.
***The “on sale” company riding the crest of two mega-trends
Over the coming years, two trends will be supporting today’s company. The first is one regular Digest readers are quite familiar with — electric, autonomous vehicles.
The old science fiction fantasy of a driverless car is practically here. Every major automaker is pursuing this technology. Whether you realize it or not, it’s going to change how we travel and live. And in doing so, it will add $7 trillion to the global economy.
The second trend is one we officially added to our trend-list only recently — China.
You see, several weeks ago, Matt went to China to conduct boots-on-the-ground research. And what he saw there was not the doom-and-gloom in the news headlines, but was, in fact, abundant opportunity.
As Matt wrote to his subscribers, even with its economic slowdown, China’s growth remains robust, above 6% each year, which is the envy of most nations.
Plus, when you’re talking about a nation with 1.4 billion people — more than 4X the number of people in the United States — even “just” 6% growth means a lot of money is changing hands among a lot of people, businesses, and the government.
***Part of what will be driving the growth of today’s company is basic demographics and urbanization, so let’s go over a few statistics
Matt tells us that in 1978, 17.9% of the Chinese population lived cities. By the end of 2017, that number had surged to 58.5% — and this migration is far from over.
According to Global Demographics, China’s urban population will increase from 834 million today to 989 million by 2028. That’s almost one billion people in China’s cities, which would represent 70% of the total population.
Now, let’s look at what this means in practical terms, as it relates to electric cars, and eventually driverless cars.
From Matt, referencing his recent visit to Shanghai:
With more than 20 million people in the city, I can tell you firsthand that the everyday traffic rivals that of Los Angeles at rush hour. To keep the number of cars on the road to a minimum, potential car buyers must first be granted a permit. And that permit costs around $12,000!
You can get out of the fee … if you buy an EV. That’s right. Shanghai waives the $12,000 if you purchase an electric vehicle. So, unless you are incredibly rich, it makes zero sense to buy a regular, gas-guzzling car.
Obviously, the Chinese government is incentivizing electric vehicle adoption. But electric vehicles are just the next step as we move toward full autonomous vehicle adoption. Back to Matt:
The expansion of EVs around the world paves the way (so to speak) for autonomous vehicles (AVs) to see similarly incredible growth. Today they are just a concept. Within a few decades, I expect them to be the most popular vehicles on the road. The chart below of projected AV car sales looks very similar to the growth of EVs above.
In Beijing and other major Chinese cities, auto companies are testing AVs and logging hundreds of thousands of miles. One company in this space that stands above the rest just so happens to be one of our latest recommendations …
***This brings us to the company standing in the crosshairs of the China-growth and EV/AV trends
So, which company is at the center of all this?
For those of you less familiar with Baidu, you might think of it as the “Google of China” since it dominates Chinese online search. You see, Google itself is banned from China, and Baidu fills the void. It accounts for about two-thirds of China’s search market with approximately 175 million daily active users.
Recently, Baidu’s stock has been getting hammered, as you can see below.
Behind this are two issues.
First, Baidu has gotten caught up in the sell-off which a great many Chinese stocks have suffered due to the tariff war. This is simply reactionary selling, and its effects will fade away over the longer-term.
Here’s how Matt sees it:
The obvious trade issues between the U.S. and China have had a direct impact on the stock’s performance, even though they will have little or no impact on the long-term growth and potential.
But second, and more important, Baidu recently reported its first quarterly loss since it went public in 2005. And this is significant. Revenue growth has slowed somewhat the last few quarters, though sales still increased a solid 21% in the first quarter.
Now, if Baidu was nothing more than an online search engine company, then this would require greater pause. But here’s Matt’s take:
Those who sold the “Google of China” are ignoring the long-term plan for Baidu. That’s why we can say “thank you very much” as we buy at bargain prices given to us by the kneejerk sellers.
So, what is this long-term plan? Well, that takes us back to autonomous vehicles …
***Baidu is positioned to be an AV leader not only in China, but also around the world
Now, you might be scratching your head, wondering how a search-engine company is involved in autonomous vehicles. Well, first, remember that Google itself is doing the exact same thing with Waymo, its own self-driving unit.
Two, Baidu isn’t just a “search” company — it’s a sprawling tech company, with all sorts of different AI projects. That’s what lots of the investors who are selling are forgetting. And in this case, they’re forgetting “Apollo,” Baidu’s AV technology.
Baidu’s AV technology, referred to as Apollo, is the leader in China. In a few years, it could rival Google’s Waymo — yet another reason to think of Baidu as the Google of China.
The Apollo platform already has more than 130 partners around the globe with car manufacturers, parts suppliers, and other secondary businesses. It has been used by over 12,000 developers working on its platform in the last few years.
My first stop in China was Beijing, and Baidu is the runaway leader there in AV miles driven. A total of eight companies have AVs on the road in that city, and Baidu accounts for an astounding 91% of miles driven in cars like the picture above …
The AV part of the business is still quite small, but within the next decade I expect it to join AI applications as the primary growth drivers.
***So, what has the recent sell-off done for Baidu’s valuation?
Matt tells us that after pulling back 60% from its all-time high in June 2018, Baidu is now valued around $38 billion. As a direct comparison, Alphabet, the parent company of Google, is valued at $727 billion.
When we factor in each company’s expected 2020 revenues, Baidu trades with a price-to-sales ratio of 1.9, while Alphabet trades at a price-to-sales ratio of 3.9.
Here’s Matt for the significance of this:
Baidu trades at half of Alphabet’s valuation. I am in no way saying they are equal and should fetch the same valuation. I am saying that Baidu could easily trade at 2.5 times 2020 sales — 30% higher than now — and still be undervalued …
It was a strong buy (a month ago, before pulling back 30%) and it’s an even stronger buy today. Can you hear me pounding the table?
***Coming full circle, when does a falling stock price mean “sale!” as opposed to “bad investment, stay away”?
The idea that started this Digest — investors running away from a sale — was a fun oversimplification. But the truth is, sometimes, a sell-off is warranted and does not mean it’s a good buying opportunity. So, how do we tell the difference?
Wise investors often make this decision by comparing “what’s the issue today?” with “what’s the opportunity tomorrow?”
And as we’ve seen, the issues today are a trade-war — the long-term effects of which will go away — and a slowdown in Baidu’s search-engine business. And while this second issue definitely is significant, it’s overshadowing “the opportunity tomorrow” which is Baidu’s massive growth as the autonomous vehicle trend develops. But this overshadowing is what’s leading to the today’s great prices.
Here’s how Matt sums it up:
In Baidu, we have the leader in search in the world’s most populous country that is growing at about 6% annually … with significant upside potential in AVs … and we can buy all this for just 2.5 times sales. That’s a bargain.
It makes BIDU the best buy in China, and in my mind, perhaps the entire market right now.
Another big thanks to Matt for allowing me to share this pick with our Digest readers. Keep in mind, the “Google of China” isn’t the only Chinese recommendation Matt has for subscribers. He’s also found the “Facebook of China,” the “Amazon of China,” and the “Netflix of China.” If you didn’t get into the FANGs early on here in the U.S., this is your second chance — in a market that’s even bigger. For more from Matt and his Investment Opportunities service, .
We’ll continue to keep you up to speed on China and Baidu here in the Digest.
Have a good evening,
The post appeared first on InvestorPlace.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.