Baidu Bulls Sleep On It

Things seemed daunting for Baidu (Nasdaq: BIDU  ) investors after Tuesday night's first-quarter report.

The stock shed more than 10% of its value in after-hours trading shortly following the results. Earnings growth was strong, but worrywarts gravitated to the slightly-lower-than-expected revenue. More importantly, the midpoint of its top-line guidance for the current quarter was well below what Wall Street was forecasting.

China's slowing? Baidu's growth is decelerating faster than the pros were projecting? Oops! Analysts at Stifel Nicolaus, Standard & Poor's, and Morgan Stanley all slashed their profit targets on China's leading search engine. Baidu itself doesn't provide a bottom-line outlook, but if top-line growth is slowing, it follows that the dot-com darling's profitability will take a hit.

However, two important things happened between Tuesday night's grim report and Wednesday's opening bell.

For starters, Apple (Nasdaq: AAPL  ) reminded investors why tech investing is still king. As big as the world's most valuable company is, Apple can obliterate income estimates with ease when it rains 35 million iPhones from the sky.

As tech stocks stormed back into favor, Baidu opened just 4% lower. It wasn't pretty, but more than half of the prior night's carnage was overcome. The stock spent most of the trading day inching its way out of what once was a massive hole. The second important thing that happened -- after Apple's inspirational report -- is that analysts weren't necessarily down on the company after the report.

Morgan Stanley's Richard Ji was impressed by Baidu's growth in revenue generated per click. This is a pretty big deal, since global leader Google (Nasdaq: GOOG  ) suffered a 12% year-over-year decline in revenue-per-click during the same period. Ji and Stifel Nicolaus analyst George Askew didn't downgrade the stock, they simply reiterated their prior ratings. S&P's Scott Kessler, on the other hand, upgraded the shares from buy to strong buy.

By the time the closing bell rang, Baidu's stock was at $134.82. Shares that were staring at a double-digit decimation the night before closed a mere 0.7% lower on an otherwise buoyant day.

The concerns remain. Growth is slowing at Baidu, and that may bleed into the guidance provided by China's other Internet companies as they report in the coming weeks. However, in a market where superior growth rates are often hard to find in very profitable companies with ridiculously high margins, it's hard to look at the 56% to 60% revenue growth that Baidu is expecting for the current quarter as a disappointment. Baidu's trading at less than 30 times this year's projected profitability and a little more than 20 times next year's bottom-line forecast.

Baidu bounced back because -- at the end of the day -- it's a pretty cheap stock relative to even its slowing growth rate.

Bullish on Baidu
A bullish call on Baidu has served me well on Motley Fool CAPS over the years. True to the CAPScall initiative, I'm not going to give up on it now. Baidu has soared 1,516% since I recommended it to Rule Breakers newsletter subscribers six years ago, but now it's time to discover the next rule-breaking multibagger. It's a free report. Want it? Get it.

The Motley Fool owns shares of Google and Apple. Motley Fool newsletter services have recommended buying shares of Google, Apple, and Baidu, as well as creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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