It's so easy to hate on Baidu (Nasdaq: BIDU ) these days. China's economy is slowing. The shift to mobile from desktop poses more threats than opportunities for paid-search providers. And now, for the first time since Google (Nasdaq: GOOG ) staged a partial retreat out of China, Baidu has a company legitimately nibbling away at its market share.
With earnings around the corner -- Baidu reports on Monday night -- is it time to sell or wait this rough stretch out on the sidelines? Well, let me spell out the reasons I think China's leading Internet company is likely to move higher in the coming days.
1. Baidu is still growing at a heady rate
Despite the bearish sentiment festering in a growing number of analysts, Baidu is still a speedster.
Wall Street sees revenue for the third quarter climbing 53% to a cool $1 billion. Earnings should grow slightly faster, soaring 54% to hit $1.29 a share.
Does this seem like the kind of company that growth investors should be shying away from? Even if we look out to next year, analyst targets stand at a still healthy 33% spurt on the bottom line, with a 40% top-line pop.
Yes, that's decelerating growth, but keep in mind that even 33% in earnings growth next year would find Baidu growing its profitability twice as fast as Google's projected 16% clip.
2. Baidu has a history of surpassing expectations
All other things being equal, the stock should rally if Baidu simply matches the profit of $1.29 a share that the market's looking for. It would be a sigh of relief. The market will realize that the summertime emergence of Qihoo 360's (NYSE: QIHU ) new search engine isn't much of an initial threat.
What happens if Baidu's net income clocks in even better than that?
It could happen. In fact, it's exactly what has happened in each of the past 13 quarters. The trend suggests that Baidu will stretch that streak to 14 quarters come Monday night.
3. Qihoo 360, at best, is Bing
Remember when Microsoft (Nasdaq: MSFT ) introduced Bing, and everyone started to wonder whether it had a shot at dethroning Google? We know the answer now. Bing had its first wave of novelty appeal, but Google continues to hold its commanding market share.
At the same time, Google and Bing have both gained market share over the past year. They're simply swiping attention from lesser players, and even if that wasn't the case, the sheer volume of searches performed grows at a pace where this story doesn't have to be about a single winner.
Likewise, a new Analysys International study shows that China's search engine operators experienced a 51% year-over-year surge in revenue, and Baidu's still dominant at 78.6%. Sure, the figure was was closer to 80% earlier, but the pie is growing so quickly that a slight slip is not much of a factor.
4. Mobile matters
The smartphone revolution is more of an opportunity than a threat. China Mobile (NYSE: CHL ) -- the world's largest wireless carrier -- closed out September with a whopping 698.5 million customers. Even if many of those accounts are on older feature phones, the shift to smartphones is making computing more portable.
Until recently, mobile was seen as a challenge. The mobile screen is too small to monetize with a column of ads off to the side. Folks on mobile phones aren't interested in clicking on ads.
Well, that mindset is changing, and for that we can thank Facebook (Nasdaq: FB ) .
"I think our opportunity on mobile is the most misunderstood aspect of Facebook today," CEO Mark Zuckerberg said on Tuesday night during the social-networking giant's conference call. "I believe that over the long run we're going to see more monetization per time spent on mobile than on desktop."
His thinking is that mobile users make more frequent visits to Facebook, and that there are ways to get sponsored spots in front of smartphone owners. Facebook's figuring it out, even though it didn't start monetizing mobile until March. Google -- facing the same challenge as Baidu -- still hit a new all-time high last month. If the opportunities exist here, they will definitely materialize in the larger and faster-growing Chinese market.
With Baidu's report on Monday night so much more likely to please than disappoint, don't bet against the former dot-com darling next week.
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