Baidu (NASDAQ: BIDU) has become one of the more frustrating stocks for U.S. investors. As the leading search engine in China, some have called it the "Google of China." Like Google parent Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL), it has developed potentially lucrative cloud and artificial intelligence (AI) businesses.
However, a delisting threat in 2022 from the Securities and Exchange Commission (SEC) and the tenuous state of U.S.-China relations have made some investors question whether international stocks like Baidu are investable. Hence, investors should weigh Baidu's growth potential against those risks before opening a position in the stock.
Understanding the geopolitical tensions
China has long been a major trading partner with the U.S. Investors have long viewed this as a positive, as China's 1.4 billion people and status as an emerging market offer potentially lucrative investment opportunities.
While U.S.-China relations hinge on many issues, only one directly affects Baidu. Since American investors cannot buy Chinese stocks directly, they invest in American Depositary Receipts (ADRs), bank-issued shares from a bank that has a business partnership with a foreign company.
Such arrangements are usually friendly to investors. Nonetheless, Chinese stocks such as Baidu faced a possible delisting in 2022 as U.S. regulators sought access to the financial audits of Chinese companies. While the U.S. and China came to an agreement that averted delisting, it led to questions about the investability of Baidu and other stocks.
The case for Baidu
However, for all the concerns about the U.S.-China rivalry, it has no direct effect on Baidu stock. According to StatCounter, Baidu controls about 55% of the internet search market in China. Moreover, the company serves Chinese consumers and businesses exclusively, so its government's relationship with the U.S. should not affect Baidu's business. Furthermore, Alphabet's Google only has a small market share in China.
Image source: Statista.
Additionally, like Alphabet, it hopes to derive increasing revenue through the cloud and self-driving technology. Baidu also owns Iqiyi, a hybrid of Netflix and Alphabet's YouTube that offers content developed by professionals and amateur users.
In 2023, Baidu generated 135 billion renminbi ($19 billion) in revenue, a 6% yearly increase. Thanks to efforts to limit cost and expense growth, it reported a net income attributable to Baidu of 20 billion renminbi ($2.9 billion), up from 7.6 billion renminbi in the previous year.
Still, Alphabet's revenue grew by 9% in 2023. Moreover, Alphabet's operating margins were 27%, versus just 16% for Baidu.
Baidu's weaker performance compared to Alphabet may explain why the stock price has fallen by about one-third over the last year as investors have fled stocks like Baidu.
That has taken Baidu's price-to-earnings (P/E) ratio to 13, near multi-year lows and half of Alphabet's 26 earnings multiple. Nonetheless, Alphabet investors do not have to worry about political risks, and with its higher operating margins, investors may prefer Alphabet despite its higher valuation.
Should investors buy Baidu stock?
Buying Baidu mostly depends on the risk tolerance of the individual investor. Any investor who cannot tolerate geopolitical risk should avoid Baidu. Additionally, even the investors willing to take the risk may choose Alphabet due to its stronger financial performance.
Admittedly, investors could make a case for buying Baidu stock with speculative funds. Profit growth has improved dramatically, and if Baidu or its government can ease investor worries, the stock could bring investors outsized returns.
Still, considering the risks involved in pursuing this opportunity, it is likely not a stock suitable for most investors.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Baidu, and Netflix. The Motley Fool has a disclosure policy.
