Betting Against Baidu Is Bad

Baidu (NASDAQ: BIDU  ) is getting bashed again.

An otherwise quiet news day on Monday was interrupted by a bearish analyst note on China's leading search engine.

Credit Suisse's Wallace Cheung, reiterating his pessimistic underperform rating on the shares, lowered his price target on the stock from $82 to $80. Baidu investors shook off the knock, sending the stock to a slightly higher close on the final trading day of 2012.

It's not the only thing that investors should be shaking off.

Cheung's argument -- as retold by Barron's Emerging Markets Daily blog -- is pretty weak.

A major part of the bearish thesis is that Baidu will use the $1.5 billion that it raised through a pair of public debt offerings in November on acquisitions.

Really?

Cheung offers up three potential acquisition targets. To combat Qihoo 360 (NYSE: QIHU  ) invading its search turn this past summer, two possible purchases include Kingsoft (China's second-largest player in Qihoo's online security stronghold) and mobile browser player UCweb. His third candidate is SINA Weibo.

Even Cheung concedes that his third target isn't likely. SINA's (NASDAQ: SINA  ) unlikely to part ways with its popular micro-blogging website, and Baidu seems unlikely to go after a site that gobbles up traffic but has crushed margins for its parent company.

However, the point here is that any of these three deals would be good for Baidu. The company is paying just 2.25% to 3.5% on its new debt. The returns on any of these acquisitions should be greater than letting that money sit idle on Baidu's balance sheet. There are also synergies that will arise once any companies snapped up start receiving promotion through the dot-com giant.

In the end, why bet against Baidu? The Chinese Internet speedster is growing fast. Analysts see revenue and net income climbing 36% and 27%, respectively, this year. Those targets may prove conservative, since Baidu has surpassed bottom-line expectations in each of the past four quarters. How can Baidu not be a steal here at less than 17 times forward earnings?

If you need more proof that Baidu going on a shopping spree would a positive development, just remember what happened last week. Diodes (NASDAQ: DIOD  ) agreed to pay more than twice what the market felt that China's BCD Semiconductor (UNKNOWN: BCDS.DL  ) was worth, yet shares of Diodes rose on the news.

China's cheap, and it's a great time for Baidu to step up with spending money.

Betting on China
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  • Report this Comment On January 02, 2013, at 12:50 PM, tilu13 wrote:

    I noticed that QIHU might be doing a search ad deal with Google, and while this may sound like a good idea and potentially give BIDU more competition, I wonder if it really is a good idea for QIHU. After all, the chinese government does not like Google at all. I would think that teaming up with Google might be a dangerous thing for QIHU to do. And if that is the case, then that should be a good thing for BIDU .... just a thought.

  • Report this Comment On January 02, 2013, at 12:57 PM, BabyBeluga2 wrote:

    If it is indeed an opportune time for giant BIDU to spend some cash, why wouldn't BIDU buy some stake in any of these companies? It already has a partnership with SINA for mobile search. The two companies are well acquainted.

  • Report this Comment On January 04, 2013, at 11:29 PM, BabyBeluga2 wrote:

    A reason for BIDU to take a stake in SINA Weibo: increasing mobile offerings (Weibo has a large mobile presence) and holding on to market share in search now challenged by QIHU by gaining better access to Weibo's 420 million users.

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