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With China's economy slowing, and the country's Internet base maturing, it's easy to be skeptical about the former dot-com darlings.
Despite the volatility and cynicism, Baidu (Nasdaq: BIDU ) has been one of the more resilient players.
Last year was generally a lamentable one for investors buying into the Chinese miracle. Accounting scandals, that were far outnumbered by the accusations, and a slowdown in China's bubbly economy, led many market watchers away from the world's most populous nation. However, Baidu still managed to close out 2011 with a nearly 21% gain.
This year hasn't been easy on many of China's equities but, as of yesterday's close, Baidu is still clinging to a 1% gain for 2012.
Sure, Goldman Sachs rained on the parade yesterday, taking down its price target on the search engine giant from $160 to $135. It doesn't mean that Baidu isn't a compelling buy at this point.
It is -- and let's get into the reasons why Baidu is in an excellent position to beat the market from here.
1. Baidu is historically cheap
There are rear-view mirror investors, and then there are those who prefer to keep an eye on the road ahead. The distinction is subtle when we're talking about slow-growing and mature companies, but the schism is wide when we're looking at heady growth stocks.
Baidu earned $3.02 a share last year. Wall Street's looking for a profit of $4.56 a share this year, and $6.33 a share in 2013. Rear-view mirror investors will argue that Baidu is expensive because it's trading at 39 times last year's earnings. Open road investors will argue that Baidu is cheap because it's trading for less than 19 times next year's earnings.
Forget the multiples for a moment. We're looking at a company where profitability is projected to more than double between 2011 and 2013. That's huge.
Let's go back to 2011. It was great to see Baidu shareholders rewarded with a 21% pop, but revenue and earnings soared 83% and 88% respectively last year. Revenue and earnings climbed 75% and 76% respectively during this year's freshman quarter. The stock obviously hasn't kept pace, even with a quarter of that growth. In other words, Baidu's multiples are getting cheaper.
Things can always go wrong, but if they don't, just remember the time when you could've picked Baidu at a forward earnings multiple in the teens.
2. Mobile is an opportunity -- not a threat
Baidu's nearly 80% market share in search is no match for its mere 35% chunk of the fragmented mobile search market.
Goldman Sachs is worried, and understandably so. Mobile search isn't as easy to monetize as traditional desktop search. Baidu also has to enter into revenue-sharing arrangements with handset makers, as it did last week with Apple (Nasdaq: AAPL ) , to get primo positioning in its Safari browser on iPhones sold in China.
Bears will argue that mobile is replacing conventional computing, but anyone who owns a smartphone knows that having a data-slurping phone means that they’ll probably spend more time tethered to cyberspace across various devices. The end result should be incremental.
Haven't we seen that with Google (Nasdaq: GOOG ) ? Obviously, Big G is much further along in its growth cycle, so slowing growth is part of the maturing process. However, the company hasn't had a problem growing search revenue and net income, and we're years into the smartphone boom.
3. Baidu remains the top play in China's technological evolution
Why is China growing so quickly? The one-two punch of a rapidly improving economy, and being in the early stages of Internet migration, has given Baidu and other dot-com speedsters the ability to post impressive growth. In Baidu's case, the average advertiser is gladly spending 49% more on the site than it was a year earlier.
There are cheaper plays with some skin in paid search. Sohu.com (Nasdaq: SOHU ) -- the parent company of the small, yet growing, Sogou search engine -- trades for just 11 times next year's earnings. However, Sogou makes up less than 10% of the revenue mix here. Sohu is also invested in a profit-draining video venture, to the point where analysts see lower earnings in 2013 than they saw in 2011.
Qihoo 360 (Nasdaq: QIHU ) is another thinking investor's dot-com play. The company behind China's most popular Internet browser -- and a suite of online security tools -- is growing even faster than Baidu, and trades at just 15 times next year's bottom-line target. However, Qihoo 360 has been the target of skeptical blogs in the past. Its specialties can also be more easily disrupted than Baidu, which practically enjoys a government-sanctioned monopoly in paid search.
The juiciest cut of the Internet will always be paid search. Google investors who got in early can attest to that, and now Baidu is priced to the point where it should easily beat the market.
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 1,300% 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.