Musings on Apple and Baidu

Despite overall market strong performance over the last two quarters, there are some noteworthy companies that not only didn’t participate in the rally, but suffered significant declines just as the markets were hitting new highs.  Apple and Baidu crushed the market over the last several years, but both suffered nearly 40% declines from their peak.

After reaching its peak last September, Apple price was pushed down by fears of increased competition, margin pressures, and perceived lack of new innovation. While the first two issues have some merit, I don’t think that they can possibly account for the valuation assigned to Apple these days — on the PE basis, it trades lower than technology stalwarts such as Microsoft or Intel, but still growing considerably faster. As for lack of innovation — even under Steve Jobs, there were only three major innovations: 2001 (iPod), 2007 (iPhone) and 2010 (iPad). There were no new disruptive products introduced for 6 years between 2001 and 2007, and many (myself included) in 2010 thought that the new iPad was just a big iPhone without calling capability. Market perception can and does change quite often: for example, Netflix, the best performer during this quarter, was universally hated last summer and traded at about a third of its current price. While it is highly unlikely that Apple can triple its price from here, at least reaching its prior highs is a good possibility. A number of fairly likely events in the near future, such as raising dividend, striking a deal with China Mobile, or introducing new products, could act as a catalyst for price appreciation.

Baidu, also known as Google of China, fell out of grace due to competition, slowing growth, and perceived difficulties in monetizing mobile search. While the revenue growth did slow down about 30% per year, it is still very respectable. Baidu is growing much faster than Google, yet trades at lower multiples. If you recall, Google itself was criticized for poor mobile revenues, and in fact, Google stock price was stuck in a trading range for several years before finally breaking out last fall.

The last several months were extremely frustrating for Apple and Baidu shareholders as they watched stock prices trade at yearly lows just as overall market was making new highs.  However, I think that patient investors will be rewarded for placing their faith in these world class companies.