Share  |  Print
Company Spotlights: 3Q21

Baidu logo


Baidu (NASDAQ: BIDU) is a Chinese technology giant with over 70% market share in internet search. Often referred to as the “Google and Netflix of China,” the company has expanded into new markets, growing from a leading search engine and online video provider into one of the premier artificial intelligence (AI) and autonomous driving companies using attractive margins and cashflows from its core business to reinvest in new areas. Today, as a result of its continued innovation, we believe the company can be more accurately described as the “Google and Netflix” meets the “Alexa and Waymo” of China.

Volatility Spurred by Short-Term Thinking

Despite the company’s solid fundamentals, Baidu’s shares have experienced high volatility. The company has largely been misunderstood by the market, making it susceptible to short-term noise. Since Ariel initiated a position in Baidu more than five years ago, its portfolio has only continued to diversify, strengthening its underlying capabilities and addressable market opportunities. We believe the business will be resilient as it continues to evolve over the long term.

Temporary headwinds that drove various dips and corrections include: a drop in advertisement pricing driven by TikTok; a tariff-war related GDP slowdown; the global pandemic; adverse regulatory changes in its healthcare vertical; and China’s recent regulatory crackdown on the internet sector. Baidu’s investments in next-generation technologies are poised to benefit the Chinese economy and people. Unlike some industry peers, its strategies are consistently in strong alignment with the Chinese government’s national priorities and policies centered on spurring domestic demand, innovation and self-reliance. Despite this alignment, Baidu still fell in sympathy with all other Chinese internet sector corporations when the government tightened regulations.

In addition to these recent trends, Baidu has faced a long-term challenge since its founding: Many in the market incorrectly see Baidu as a business-to-business (B2B) company. In the technology industry, investors fail to recognize key differences between business-to-consumer (B2C) companies, such as Amazon and Alibaba, and B2B companies, such as Baidu and Microsoft, which initially lag their B2C counterparts.

New Investments in Support of Sustained Growth

While we recognize the greater political risk of investing in emerging markets such as China and incorporate an appropriately higher risk premium in the discount rate in our valuation models, we believe Baidu’s business strategy is aligned with national policies and priorities and is therefore not adversely impacted—unlike other players in the internet sector who are in the eye of the storm. Baidu has made large, near-term research and development (R&D) investments in many next-gen technologies such as AI, which are expected to benefit the country and globe. There is a global arms race on AI applications such as autonomous driving, where Baidu has been recognized by the Chinese government as a “national champion.” For example, the company’s autonomous driving platform and data service, Apollo, brings twice as much data on miles driven than any other peer system in China. In addition, Baidu’s cloud offering has a highly differentiated Platform as a Service (PaaS) capability that serves a more demanding enterprise customer base. Such industrial-grade efforts require long-term execution and temporarily drag down margins. While these new initiatives require significant upfront costs—supporting the adage, “you have to spend money to make money”—we support Baidu’s capital allocation strategy. What strains margins and profits today will lead to new pillars of growth and reinforce the company’s moat tomorrow.

In sum: while B2C business models, such as Alibaba, may be easier to understand and enjoy faster earnings velocity; B2B business models like Baidu’s tend to have a longer investment cycle with more enduring payoffs. We witnessed this with Microsoft (largely a B2B business model) compared to stocks like Facebook, Amazon, Apple and Netflix. Initially, Microsoft’s earnings and stock lagged. But as its investments came to fruition, the stock re-rated. Ariel expects a similar story to play out for Baidu. As such, we will continue to own the company as one of our top ten positions across all of our global portfolios.

BorgWarner Logo


BorgWarner (NYSE: BWA) is a leading, global provider of technologies for combustion, hybrid and electric vehicles. Its Air Management group accounts for 55% of the company’s revenue with products such as gas turbochargers, engine timing systems, eBoosters, eTurbos, battery heaters and emissions systems. Its other products include drivetrain applications such as all-wheel-drive, dual clutch transmission and transmission components. The company was once a part of Borg Warner Security, but was spun off as a standalone company in 1993. It employs approximately 50,000 people around the globe.

While BorgWarner, like many of its peers, must continue to navigate near-term supply chain challenges resulting from the pandemic, the company is evolving to deliver sustainable technology solutions to meet the needs of a changing industry.

Supply Chain Headwinds are Short Term

BorgWarner’s revenues are split equally between the Americas (31% of revenue), Europe (35%) and Asia/Rest of World (34%). This geographic mix enables the company to better manage volatility in any market. However, the entire auto industry is facing supply chain issues resulting from the impact of COVID-19 on the global economy, which is limiting vehicle production. As such, the company’s client base is temporarily stalled. We view this as a short-term issue that does not threaten BorgWarner’s long-term growth.

Energy-Efficiency Embedded in Business Strategy

Globally, auto manufacturers are evolving their business models to dampen their environmental impact—with a focus on improving fuel economy and emissions. At the same time, regulators are setting demanding standards for the future. BorgWarner stands to benefit from this industry-wide shift, as its products help auto makers limit their environmental impact and meet these regulations. For example, a BorgWarner turbocharger enables car makers to use a smaller, more powerful engine that uses less fuel, resulting in lower emissions. We believe increasing regulatory changes will continue to drive demand for BorgWarner’s products—from turbochargers in combustion engines, to components for hybrid and electric engines.

Actively Transitioning from Combustion to Electric

The transition from internal combustion engines to hybrid engines and electric motors is accelerating. BorgWarner is a market leader in the legacy gas and diesel combustion markets. Its turbocharger business for gas and diesel engines has approximately 25% market share. Some believe the company won’t have the same position in the hybrid and electric motor businesses, even with recent acquisitions improving its product offering. BorgWarner expects 45% of revenue to come from electric vehicles by 2030. That’s up from less than 3% today. The company plans to transition with the industry. Additionally, it expects to benefit from more content per vehicle in electric cars versus traditional combustion vehicles, further supporting revenue growth.

In our view, the market is overly focused on temporary supply chain challenges and underappreciating the evolution of BorgWarner’s business. We believe the company is well positioned to limit the environmental impact of automobiles and meet the increasing fuel economy and emissions regulations.

As of September 30, 2021, shares traded at $43.21, a 31.4% discount to our current private market value of $62.96.

CBRE Group Logo

CBRE Group

CBRE Group (NYSE: CBRE) is the world’s largest commercial real estate services and investment firm, with leading global market positions in leasing, property sales, occupier outsourcing and valuation businesses. Founded in San Francisco in 1906, CBRE Group operates in more than 100 countries and its diversified client base includes more than 90 of the Fortune 100 companies. As of June 30, 2021, CBRE Investment Management reported $129.1 billion in assets under management.

CBRE Group demonstrated resilience through the pandemic—stabilizing its revenue base by expanding into new lines of business and categories of clients. The company’s strong fundamentals will support its continued growth, as we expect CBRE to benefit from industry tailwinds during a sustained period of recovery.

‘Return to Office’ is Upon Us

Before the onset of the pandemic, several factors contributed to favorable real estate industry conditions: declining vacancies amid increased demand for office space, higher rents, low-cost credit and growing allocations to commercial real estate. The pandemic hit the industry hard and, like many of its peers, CBRE shares traded down as office sales and leasing activity came to an abrupt halt and deals were delayed or cancelled. Uncertainty and market groupthink set in as many began to believe ‘work from home’ was here to stay. While many companies are rethinking office space requirements or considering a hybrid model, we continue to see evidence that many firms will return to a traditional working environment over time. Leading companies have set a standard by calling employees back to the workplace, reinforcing offices as essential to culture and teamwork.

Diversification Stabilizes Revenue Base

Through a combination of organic growth and strategic acquisitions, CBRE Group has grown its client base and the range of services it provides—leading to a more stable and recurring profit base. This is important as the market tends to pay a higher multiple for non-cyclical earnings. In recent years, the company’s contractual relationships have increased to represent slightly more than 80% of revenue in 2020, compared to less than 60% a decade ago. We are confident CBRE’s Global Workplace Solutions outsourcing business, comprising more than 40% of today’s revenues, has major potential. Eighty percent of corporations still internally manage their real estate and we believe many will soon turn to real estate services firms like CBRE Group to capture cost savings.

A Strong Recovery

CBRE Group has been one of Ariel’s best-performing stocks from the pandemic market lows. The economic downturn helped the market recognize CBRE Group’s business model is no longer solely reliant on highly cyclical property sales and lease transaction revenue; rather, it has moved meaningfully towards a stable revenue base, supported by its global footprint.

Today, CBRE Group maintains a leading market position, significant recurring revenue base, strong balance sheet and a diversified business, client and geographical footprint. It is a conservatively run franchise with a track record of generating solid free cash flow with high returns on capital and equity. We expect the company to continue to benefit from accelerating trends of globalization, the outsourcing of real estate services and increased institutional demand for commercial real estate.

As of September 30, 2021, shares traded at $97.36, which is closing in on our estimate of CBRE Group’s private market value.

Gentex Logo


Headquartered in Zeeland, MI, Gentex (NASDAQ: GNTX) is the leading supplier of automatic-dimming mirrors for the car, truck, and airplane industries. With over 90% market share and a long history of technological innovation and manufacturing capability, the company consistently has outgrown the broader industry, earned best-in-class operating margins and generated attractive free cash flows. Over the past year, it appears that persistent supply chain disruption has both increased investors’ myopia and reignited a longstanding concern that autonomous vehicles may not need rearview mirrors in the future. We view both concerns as overblown and see this as an opportunity to own a high-quality niche franchise with excellent growth prospects that is well-positioned to benefit from expanding market adoption of its essential technologies.

Looking Beyond the Supply Chain

With nearly all of the company’s revenues tied to global automotive production, Gentex has not been immune to the well-publicized supply chain challenges. Despite strong post-pandemic demand for new cars, component shortages and freight bottlenecks have halted vehicle production and inflated costs. Fortunately for Gentex, most of the impact so far has been relatively muted and confined primarily to lost revenues. Input cost inflation has been mitigated by the company’s domestic manufacturing footprint and its historical practice of holding excess raw inventory in anticipation of such disruptions. Once these near-term issues subside, the company will be well-positioned for attractive secular growth given the increasing market adoption of its core technology and more nascent next-generation solutions.

More Than Just Mirrors

Whenever the auto cycle faces uncertainty, a longstanding bear argument reliably re-surfaces: autonomous vehicles will not need mirrors at all. The data suggests otherwise. Market adoption for automatic-dimming mirrors has consistently grown for decades and even bullish forecasts for fully autonomous vehicles include mirrors as a safety precaution for the foreseeable future. Perhaps equally important, approximately half of the company’s revenues come from other next-generation technologies. Its Full Display Mirror is a hybrid technology that integrates mirror and camera-based views into a single LCD display. Its HomeLink solution enables smart home controls from the convenience of the car. Its full portfolio of next-gen technologies includes additional automotive solutions, such as integrated tolling and biometric capabilities, as well as solutions for other industries, such as auto-dimming windows for commercial airplanes.

A Rock-Solid Balance Sheet

Gentex’s strong balance sheet enables it to weather the inevitable cyclical storms and stay ahead of the innovation curve. By consistently outgrowing the broader industry and generating operating margins well above its peers, the company generates excellent free cash flow—more than $2 billion over the last five years alone. While many competitors have struggled with debt during the most recent recessions, Gentex consistently carries excess cash, including over $360 million today.

At current levels, we think investors are distracted by narrow-minded supply chain concerns and lingering uncertainty over autonomous vehicles. Looking forward, we believe the supply chain will eventually find its footing, and Gentex’s portfolio of advanced technologies is well positioned for a more electrified and autonomous world.

As of September 30th, shares traded at $32.98, a 26% discount to our private market value of $44.31.

Investing in small- and mid-cap stocks is more risky and volatile than investing in large-cap stocks. Investments in foreign securities may underperform and may be more volatile than comparable U.S. stocks because of the risks involving foreign economies and markets, foreign political systems, foreign regulatory standards, foreign currencies and taxes. The intrinsic value of the stocks in which the Funds invest may never be recognized by the broader market. The Funds are often concentrated in fewer sectors than their benchmarks, and their performance may suffer if these sectors underperform the overall stock market. Ariel Focus Fund is a non-diversified fund and therefore may be subject to greater volatility than a more diversified investment. Investments in emerging and developing markets present additional risks, such as difficulties in selling on a timely basis and at an acceptable price. Investing in equity stocks is risky and subject to the volatility of the markets.

On this page, we candidly discuss three individual companies to illustrate our investment process. These companies are current holdings of certain Funds. The information and our opinions were current as of May 3, 2021, but are subject to change. The information shown does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. These securities do not represent all securities purchased, sold, or recommended to investors during the period. Past performance does not guarantee future results. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of any Fund or of any particular Fund itself. Portfolio holdings are subject to change. Click here for the top holdings of the Funds.

Click here for a Fund prospectus.

You may also be interested in:
Past performance does not guarantee future results. © Ariel Investments, LLC. This website and all of its content is for informational and educational purposes only and should not be considered to be investment advice or a recommendation to buy or sell any particular security. The mutual funds offered by Ariel Investment Trust are distributed by Ariel Distributors, LLC, a wholly-owned subsidiary of Ariel Investments, LLC. Use of this website is subject to our Terms & Conditions. The Ariel mutual funds referred to in this site may be offered only to persons in the United States. This web site should not be considered a solicitation or offering of any investment products, funds or services to ineligible investors, investors for whom such products, funds or services are not suitable, or investors outside the United States.

Check the background of Ariel Distributors, LLC on FINRA's BrokerCheck
Ariel Distributors, LLC is a member of the Securities Investor Protection Corporation