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The leading Chinese search engine opened 5% lower Wednesday morning. It could've been far worse.
Revenue growth is decelerating at Baidu, and at a pace that even Wall Street's cynical pros hadn't bargained for. Baidu's revenue climbed 50% during the third quarter, just short of the 53% top-line advance that analysts were targeting. Baidu's guidance for the current quarter -- calling for revenue to climb 38% to 42% over the prior year's fourth quarter -- is even more of a miss compared to the 46% growth that Wall Street was expecting.
This is the kind of news that has devastated stocks in the past, but Baidu's holding up surprising well. Its open of $106.82 is actually higher than this month's intraday low. Heck, the stock dipped briefly into the double digits three months ago, and that was before Qihoo 360 replaced Google (Nasdaq: GOOG ) as its search provider with an in-house solution that's gaining momentum. That was also, naturally, three months before Baidu would put out disappointing top-line guidance for the balance of 2012.
What could be holding the stock in check? Well, let's just call Baidu out as the value that it is. Baidu opened today at less than 23 times this year's projected earnings and just 17.5 times next year's target. Even if Baidu's growth rate continues to decelerate into 2013, it's forward earnings multiple should remain a juicy discount to that growth rate for some time.
Then we should also address the nature of those bottom-line estimates. Baidu has now beaten Wall Street profit targets for 14 consecutive quarters. Yes, Monday night's top-line miss was also a beat on the bottom line.
As Baidu's customer base expands and advertisers continue to pay more -- and this did happen this past quarter despite Qihoo 360's head-turning entrance -- there's no reason to believe that Baidu will stop growing. Even if Baidu's market share contracts in the near term, the pie itself is growing fast enough to more than offset the decline.
Naturally all bets are off if Qihoo 360 closes the gap at an alarming pace. Baidu had no problem growing when Google was making headway in China. There are quarters where the smaller Sohu.com's (Nasdaq: SOHU ) Sogou is growing faster than Baidu, and that, too, has never gotten in the way of overall fiscal improvement at Baidu. However, if a fellow homegrown darling ever has a shot at dethroning Baidu, then investors will need to revisit the risk of owning the fallen dot-com darling.
However, that just seems unlikely at the moment. Qihoo 360's engine is still a novelty that may turn users off as the monetization process takes place.
The market actually got it right on Baidu today. Yes, a drop was warranted given the disappointing report. However, Baidu's too cheap to implode.
Betting on China
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