Baidu Bears Bow Out

It's no longer fashionable to bet against Baidu (NASDAQ: BIDU  ) . Nasdaq issued its latest update on short interest, and there were just 4.4 million shares of China's leading search engine sold short. 

Bearish activity has contracted sharply. There are now less than half as many naysayers as there were a year earlier, and we're talking about a dramatic drop, because skeptics were shorting 15.6 million shares of Baidu as of mid-June. 

It's easy to see why the doubters have moved on. Baidu stock has gone on to soar 54% since short interest peaked nearly five months ago, and that's with the shares correcting since hitting an all-time high two weeks ago.

It's easy to see why Baidu's been gaining believers. Its summertime acquisition of the leader in mobile apps marketplaces gives it a foothold in a growing market, where critics previously saw a weakness. Last year's arrival of Qihoo 360 (UNKNOWN: QIHU.DL  ) into the search market in China provided an early scare, but its inability to acquire's Sogou -- a deal that would have combined the second- and third-largest players in search -- exposes it as a fringe player. Baidu continues to serve up the lion's share of China's search queries.

Baidu also silenced the doubters with last month's quarterly report. It's hard to argue that a dot-com giant is on the way out in China, when revenue soars 42%. 

Baidu isn't taking its market leadership for granted. It's taking a page out of the Qihoo 360 playbook by making sure that it's a major player in online areas that could deliver search queries. Qihoo 360 became a credible threat overnight because it was the company behind China's leading Internet browser and online security software. Baidu has made battling Qihoo 360 in software a bigger part of that strategy, and we saw that yesterday with its updated release of Baidu PC 4.0.

The free software tackles Qihoo 360's strength of virus protection. It also cleans up --and speeds up -- computers. In addition, it's a stealth play for China to gain a bigger foothold outside of China, because it's available globally in several different languages. 

It certainly seemed odd to see Baidu beaten down earlier this year at a time when many of China's leading growth stocks were rallying, so one can argue that its rally in recent months was merely overdue. However, a good chunk of those gains clearly came from the net covering of 11.2 million shares sold short since June's peak. We won't get a similar short squeeze off of current levels, but you don't see too many Baidu longs complaining.

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