Wall Street's Wrong About Baidu
It's clear who the market thought was the big winner in Renren's deal to sell a majority stake in its Nuomi group-buying site to Baidu on Friday. Shares of Renren moved 5% higher after Baidu agreed to pay $160 million for a 59% stake in Nuomi, while Baidu's stock slipped 1%.
There's cruel math behind knee-jerk reactions. Baidu's market cap shed more than $300 million in value on Friday -- and probably more on a relative basis, since the Nasdaq moved nicely higher that day. Why should Baidu be marked down by roughly double the value of its investment? Nuomi isn't that bad.
Groupon may have dimmed the market's optimism for daily-deals providers, but even the bellwether has been clawing its way out of the doghouse lately. Groupon shares have more than doubled in 2013.
Nuomi is still a small player in China. It generated $120 million in general merchandise sales in its latest quarter, which resulted in just $6.2 million in revenue for Renren -- but Nuomi did have 3.8 million active paying customers, 44% ahead of where it was a year earlier. At least its popularity is moving in the right direction.
Baidu also points out that 30% of Nuomi's purchases came from mobile devices. That's important, especially for China's leading search engine.
Baidu rallied earlier this month, after it acquired China's leading mobile apps marketplace operator in a $1.9 billion buyout. The market ate that deal up, since the market was growing worried about Baidu's ability to embrace the migration from desktop search to mobile gadgetry.
In the end, Friday's sell-off was an overreaction, and not just because Baidu's market cap assumes that Nuomi is worth less than worthless. It's not. One of the reasons for Renren's pop is that is still retains 41% of the group-buying subsidiary that should become even more prolific under Baidu's watch. There will be increased visibility through Baidu's audience, and that's going to make this a good deal for both the buyer and the seller.
Baidu also had more than $5.5 billion in cash and marketable securities sitting on its balance sheet at the end of June. Are Friday's sellers really going to argue that Baidu needed that $160 million or that it was going to be more productive parked in Baidu's substantial vault of money?
Baidu and Renren did a smart thing on Friday. The market reaction only got half of that right.
The article Wall Street's Wrong About Baidu originally appeared on Fool.com.Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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