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As an investor its worth striving to ensure your overall portfolio beats the market average. But its virtually certain that sometimes you will buy stocks that fall short of the market average returns. Unfortunately, that's been the case for longer term Baidu, Inc. (NASDAQ:BIDU) shareholders, since the share price is down 20% in the last three years, falling well short of the market return of around 40%. On the other hand the share price has bounced 9.7% over the last week.
On a more encouraging note the company has added US$2.9b to its market cap in just the last 7 days, so let's see if we can determine what's driven the three-year loss for shareholders.
View our latest analysis for Baidu
While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One way to examine how market sentiment has changed over time is to look at the interaction between a company's share price and its earnings per share (EPS).
Although the share price is down over three years, Baidu actually managed to grow EPS by 33% per year in that time. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Alternatively, growth expectations may have been unreasonable in the past.
It's worth taking a look at other metrics, because the EPS growth doesn't seem to match with the falling share price.
Revenue is actually up 3.5% over the three years, so the share price drop doesn't seem to hinge on revenue, either. This analysis is just perfunctory, but it might be worth researching Baidu more closely, as sometimes stocks fall unfairly. This could present an opportunity.
The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).
Baidu is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. You can see what analysts are predicting for Baidu in this interactive graph of future profit estimates.
A Different Perspective
Baidu shareholders are down 3.5% for the year, but the market itself is up 14%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 1.1% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. Is Baidu cheap compared to other companies? These 3 valuation measures might help you decide.