Real-Money Stock Pick: Buying Big-Time Growth on the Cheap

The following article is part of our  Real Money Stock Picks  series. You can follow along with Andrew's  market analysis and picks on Twitter . Or you can check out Andrew's  full portfolio .

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What do you get when you find a company that's growing like gangbusters and whose price has cratered of late? The answer, of course, is a potential buying opportunity. And that's exactly what I'm here to act on today by pulling the trigger on share of Chinese search juggernaut Baidu (NAS: BIDU) .


The opportunity
Since it reached its three-month high on Aug. 17, Baidu has been absolutely hammered by the market, to the tune of 17%.

BIDU Chart

BIDU data by YCharts

The perceived problem?

Increased encroachment on Baidu's bread-and-butter search business from Qihoo 360 (NYS: QIHU) . After successfully pivoting the company from its antivirus origins into a full-on Web browser company, Qihoo has once again shifted its business model to grab a piece of the high-margin Chinese search market. Qihoo's move makes a lot of sense, since this same kind of pivot has worked before. Rival Web firm Sohu (NAS: SOHU) successfully piggybacked its popular browser into a player in the search market with the launch of its Soguo search service in August 2004.

What's spooked investors in the context of today is that Qihoo's browser makes up a substantially higher share of the Chinese Internet browser market than Sohu's, meaning its impact on Baidu's share of Chinese searches could be much more material. This is of course is undeniably true. But the comparison isn't apples-to-apples, either, because as other Fools have also noted, it was Google (NAS: GOOG) , not Baidu, that got replaced as the default search option in Qihoo's browsers. It's the one really in trouble here (as if Google's troubles in China weren't bad enough already).

Baidu's just fine
Beyond the immediate impact Qihoo's entry into the market could have on Baidu, there's plenty of reason to think Baidu should be able to maintain its prodigious growth for years to come. Just take a look to see how far Baidu's come over the past five years.

BIDU Revenue Chart

BIDU Revenue data by YCharts

And this trend should only continue as the Internet and online advertising growth in China expand. China's Internet penetration levels sit somewhere below 50% still. Reaching levels more commensurate with developed nations, somewhere in the ballpark of three-quarters penetration, would still represent another 335 million users accessing search pages. Although this trend won't happen overnight, Baidu will be a clear beneficiary here.

Baidu's also been proactive in attempting to skate where the puck's going as well: mobile. It recently launched its own mobile browser. It's also launched its own Android-based Baidu Yi mobile OS that should help Baidu to remain relevant as search traffic increasingly shifts to mobile devices. Amd it's being proactive in gaining placement in other mobile ecosystems. Apple (NAS: AAPL) announced that it will enable Baidu as a search option in its mobile browser in its latest iteration of its iOS platform, although Google will probably remain the default option. Regardless, I'm convinced Baidu has plenty of room to run in both its core desktop space, as well as in the booming mobile market.

The trade
Because it's fallen so much, Baidu is now a bargain at around $110. Trading around 28 times this year's expected earnings and 20 times next year's, Baidu looks downright cheap, even if it loses some market share on the margin to increased competition. I'm so convinced Baidu has what it takes to maintain its prodigious growth, I'm going to add $550 worth of Baidu to the Real Money portfolio I manage on Fool.com tomorrow. However, if you're not completely sold on the Baidu story, you can always check out the Fool's premium research report on Baidu to get an even more comprehensive look at the Chinese search leader. Get started today.

The article Real-Money Stock Pick: Buying Big-Time Growth on the Cheap originally appeared on Fool.com.

Andrew Tonner owns shares of Apple and Baidu. You can find Andrew and all his Foolish writing on Twitter at @Andrew Tonner.The Motley Fool owns shares of Baidu.com and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Google, Baidu.com, and Sohu.com and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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