Why Baidu Stock Crashed Today — and Then Largely Recovered

What happened

After a couple of days in which four analysts upped their price targets on Chinese search giant Baidu (NASDAQ:BIDU), the stock dropped Tuesday, falling as much as 13% in the middle of a tech stock rout on Wall Street.

However, it clawed back most of those losses in the afternoon, closing the trading day down by 3.9%.

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Image source: Getty Images.

So what

You can blame the day’s loss on Tuesday’s sell-off of tech stocks. But things could have ended a lot worse for Baidu, and one of the reasons they didn’t was because of all the support the company has been winning on Wall Street lately.

On Monday, both Goldman Sachs and British bank Barclays raised their price targets on Baidu stock, to $383 per share and $400, respectively. Then Susquehanna Financial entered a “Street high” price prediction (reports StreetInsider.com) that Baidu will hit $450 a share within a year. And on Tuesday, the cheering continued with KeyBanc posting a $390 price target.

Susquehanna noted that it was impressed with Baidu’s fourth-quarter earnings beat last week, and said it expects 2021 to be even better. “The core business continues to improve,” noted the firm’s analyst, emphasizing that Baidu remains “a leading player in China’s search market” and also the “owner of one of the top video assets in the country.” At the same time, its “AI businesses are experiencing very strong momentum.”

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Now what

The analysts had better be right about that, though, because while it’s true Baidu “beat earnings” in Q4, its sales were still down for the second year running in 2020, and while forecasts about its future growth are strong, even results that meet them may not be enough to support the stock’s extreme valuation. Total net income for the year was $3.4 billion, giving Baidu stock a price-to-earnings ratio of more than 32. Weak free cash flow for the year left Baidu’s price-to-free-cash-flow ratio at an even steeper 37.9.

With most analysts predicting that Baidu will grow earnings at about 18% annually over the next five years, I’m afraid the stock just doesn’t look like much of a bargain to me.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

View more information: https://www.fool.com/investing/2021/02/23/why-baidu-stock-crashed-today-and-then-largely-rec/

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