Mad Money

Baidu: Growth opportunity or profit problem?

Baidu may be best way to play mobile in China: Cramer

(Click for video linked to a searchable transcript for this Mad Money segment)

It seems two well respected Wall Street firms have very different opinions of Baidu. Jim Cramer takes a closer look

Analysts at Stifel Nicolaus recently came out with a note that said the stock presents an excellent proxy for betting on Internet growth in China. They upgraded the stock from 'Hold' to 'Buy' with a $238 price target.

At almost the same exact time, analysts at Morgan Stanley took a bearish stand on the same stock. They cut their price target from $185 to $179 and downgraded the rating from 'Overweight' to 'Equal-Weight'.

Are they on the same planet?

Baidu headquarters, Beijing, China
Tomohiro Ohsumi | Bloomberg | Getty Images

"I know that this kind of thing can be very confusing," said Jim Cramer. After all, what the heck are we supposed to think when the so-called experts can't even get their stories straight? But on CNBC's "Mad Money", we love a good old fashioned analyst duel like this one, because it lets you evaluate the best arguments of both the bulls and the bears to see who's really right about a stock."

Continuing with the Morgan Stanley downgrade, although the firm concedes growth may be significant, those analysts are more concerned about profits, hence the downgrade.

Specifically, Morgan Stanley expressed concerns that "Baidu will continue to invest aggressively (in infrastructure, R&D, and promotion) to strengthen its market position in mobile services. The management guided for no profit growth this year, implying the full-year margin will drop another 11 to 12 points."

In other words Morgan Stanley is concerned that profits will suffer because is spending a substantial amount of money on growth.

Ironically, the 'growth spend' is pretty much the same reason that Stifel is bullish. Those analysts say they like the stock because "Baidu is (spending what's necessary) building the dominant franchise in mobile search in China," Cramer added.

Essentially, Stifel sees huge opportunity down the road and thinks the stock is a buy now, ahead of what's to come.

Who's right? Is a buy for its growth potential or a sell for the likely decline in profits?

"I think the bullish analysts at Stifel are right and the bears at Morgan Stanley are wrong," said Jim Cramer.

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"Baidu is investing in its future—that's something I like to see from a red-hot momentum stocks that's facing growth opportunities. If anything, I would be disappointed if Baidu couldn't find anything new to invest in and was just focused on turning a profit."

And the growth opportunities may be significant.

According to Cramer's research, Baidu's mobile search revenue could expand at a compound annual growth rate of 80 to 100% for the next two years. "That's absolutely huge," he said.

And he added, "the Internet in general is still a massive growth opportunity in China . As of 2012, only 42% of Chinese households had internet access, and the government is spending $323 billion through 2020 to get more and more people connected."

All told, Cramer thinks pros are much more likely to reward Baidu for the growth than penalize it for any decline in profits.

Therefore, "If you want to play the growth of the web in China, and mobile in particular, then I think Baidu is the stock to own," he added. "The stock may seem expensive trading at 47 times earnings, but when you look at the tremendous growth, I bet it turns out to be fairly cheap on the out-years."

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