Buy Baidu.com, Inc. (ADR) (BIDU)?

In the last three months, Chinese search engine provider Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has seen a dramatic 20% drop in share price. As recently as April 9, The Motley Foolwarned that the number of internet users in China may begin to slow, which could become a threat to Baidu’s growth. Other outlooks are equally foreboding. International Business Times offered a similarly dismal outlook, explaining, “increased selling has led Baidu.com, Inc. (ADR) (NASDAQ:BIDU) stock to under-perform relative to its peers and sector, year-to-date.” Finally, The Motley Fool expanded on their already grim prognosis by later adding, “Baidu’s fallen out of favor since Qihoo 360 Technology Co Ltd (NYSE:QIHU) introduced a rival search engine last year.” Yet, while the Chinese may not have great affinity for an underdog story, it is one Americans love, and it’s the very reason we should not yet cast off the prospect of Baidu offering incredible long-term potential.

The Google of China

By examining how Baidu.com, Inc. (ADR) (NASDAQ:BIDU) stock performs on the five major value metrics of P/E ratio, P/B ratio, debt/equity ratio, free cash flow, and PEG ratio, we can see why Intel Corporation (NASDAQ:INTC) has confidence in Baidu. The companies have decided to partner in an effort to develop software for the Chinese mobile internet market.

One of the quickest and most frequently used metrics in gauging the value of a stock is the price/earnings ratio. Today, Baidu has a healthy P/E ratio of 18.4 (ttm), compared to an industry average of 27.5. This tells us that many investors are not expecting growth from Baidu the way they are from the average company in the technology sector. However, investors can expect to pay less per share of Baidu.com, Inc. (ADR) (NASDAQ:BIDU) for each dollar of earnings, and as the other metrics will show us, the prospects for healthy earnings are strong. This may be evident in understanding the investor’s outlook via the price/book ratio.

As we look at the price/book ratio of 7.5 (ttm), we see that investors are paying over seven times the book value per share. This ratio, like so many others, is most useful when compared to other companies that are similar to Baidu. In this case, the comparable price/book value for the technology sector is 3.9 (ttm). Some may be wary of purchasing a share for a multiple so far above the sector average, but it is important to remember that a company like Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has an enormous amount of value wrapped into intellectual property that would not so readily translate into the assets used to calculate the price/book ratio.

Additionally, a review of Baidu’s book value per share shows a clear increase year-over-year. Consider that the book/value per share in 2008 was $1.31, versus $11.94 in 2011, and the most recent value of $12.02 (ttm). This may underscore the recent expansion of the company in the U.S. and its ongoing investment in technology. Earlier this month, Wired discussed Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s new office in Cupertino, California, which represents the company’s expansion into the U.S.  Additionally, the company is establishing a new research lab, which is dedicated to ‘deep learning.’