Should investors avoid Baidu stock due to geopolitical risks?

Baidu (Bidu -0.19%) It has become one of the most frustrating stocks for U.S. investors. As China's leading search engine, some people call it the “Google of China.” Like Google's parents alphabet (GOOG 0.32%) (Google 0.23%)has developed a potentially profitable cloud and artificial intelligence (AI) business.

However, the Securities and Exchange Commission's (SEC) threat of delisting in 2022 and the volatile state of U.S.-China relations have some investors questioning whether international stocks like Baidu are investable. . Therefore, investors should weigh those risks against Baidu's growth potential before taking a position in the stock.

understanding geopolitical tensions

China has long been a major trading partner of the United States, and investors have long viewed this as a positive, as China's 1.4 billion population and status as an emerging market offer potentially lucrative investment opportunities. I've captured it.

US-China relations depend on many issues, but only one directly affects Baidu. Since US investors cannot buy Chinese stocks directly, they invest in American Depositary Receipts (ADRs), which are issued by banks that have business ties with foreign companies.

Such arrangements are usually advantageous to investors. Nevertheless, Chinese stocks such as Baidu could be delisted in 2022 as US regulators seek access to Chinese companies' financial audits. The U.S. and China reached an agreement to avoid delisting, but questions arose about the investability of Baidu and other stocks.

For Baidu

However, although there are concerns about the US-China conflict, it will not have a direct impact on Baidu stock. According to StatCounter, Baidu controls about 55% of China's internet search market. Additionally, the government's relationship with the United States should not affect Baidu's business, as the company only serves Chinese consumers and businesses. Furthermore, Alphabet's Google has a small market share in China.

Image source: Statista.

Additionally, like Alphabet, it expects to increase revenue through cloud and self-driving technology. Baidu also owns a hybrid of Iqiyi. Netflix And Alphabet's YouTube offers content developed by professional and amateur users.

In 2023, Baidu generated revenue of RMB 135 billion ($19 billion), growing 6% annually. Thanks to efforts to curb cost and expense growth, the company reported net profit attributable to Baidu of RMB20 billion ($2.9 billion), up from RMB7.6 billion a year earlier.

Still, Alphabet's revenue grew 9% in 2023. Additionally, Alphabet's operating margin was 27%, while Baidu's operating margin was only 16%.

Baidu's poor performance relative to Alphabet may explain why its stock price has fallen by about a third over the past year as investors fled stocks like Baidu.

BIDU data by YCharts

This puts Baidu at a price-to-earnings ratio of 13 times, near its lowest level in years and half of Alphabet's 26 times earnings multiple. Nevertheless, Alphabet investors do not have to worry about political risks, and due to its high operating margins, investors may prefer Alphabet despite its higher valuation.

Should investors buy Baidu stock?

Whether to buy Baidu or not depends primarily on the individual investor's risk tolerance. Investors who cannot tolerate geopolitical risks should avoid Baidu. Additionally, even risk-taking investors may choose Alphabet due to its better financial performance.

To be sure, investors could make a case for buying Baidu stock with speculative funds. Earnings growth has improved dramatically, and if Baidu and the government can allay investor fears, the stock could deliver huge returns to investors.

Still, it's probably not the right stock for most investors, given the risks involved in pursuing this opportunity.