1 Internet Growth Stock Worth a Closer Look

The Street has a tough time looking beyond the next few quarters. But Foolish investors like to invest with a longer time horizon -- often looking out five years or more. It's at the collision of these two opposing frameworks that the small investor can sometimes find excellent investment opportunities. Baidu (NASDAQ: BIDU  ) , China's Google (NASDAQ: GOOGL  ) -esque search and online advertising giant, is a prime example. As Baidu's profits take a temporary hit as the company boosts spending to capture future earning potential, its stock is looking awfully scrumptious -- but you'll need to zoom out 10,000 feet to taste the opportunity.

Looking past profits
With Baidu trading near all-time highs, how could the stock possibly be a buy? That's the question many investors are likely asking when they consider Baidu as a potential investment opportunity today. But let's put aside notions of the stock's historical performance and look simply at the business in light of its opportunities.

Baidu is still in its infancy. Yes, this $62 billion company is just getting started. If you've heard of a company called Google -- and I'm guessing you probably have -- you know just how important search and advertising are to the Internet landscape. And like Google, Baidu is far and away the dominant search engine in its area of operation: China. But unlike Google, Baidu's fourth-quarter revenue was a paltry $1.6 billion compared to Google's monstrous $16.9 billion during the same period.

But Baidu doesn't look poised to stay this small very long. Baidu's home country also happens to boast the world's biggest population and the world's largest smartphone market. This leaves Baidu quite a bit of runway. The growth story is evident in Baidu's impressive top-line growth. Fourth-quarter search revenue beat analysts' forecasts with a 51% year-over-year gain. The soaring revenue was driven by 11.3% growth in Baidu's online marketing customer base and success with the development of its mobile search business. First-quarter revenue guidance for $1.53 billion was also well above analysts estimates.

Profits, however, didn't look so hot. Earnings per American depositary share were down about 1% from the year-ago quarter despite massive top-line growth. Baidu's gross profit margin took a 690 basis point hit as traffic acquisition, content, operations costs, and selling, general, and administration expenses soared. But nearly all of these investments are related to an aggressive move to capture value in the rapidly growing smartphone use in the country -- spending and investments Foolish investors can get excited about.

Will the investments pay off? If the results of early investments are any indication of how Baidu's investments and spending today could pay off, the reward could be sweet. Despite revenue growth of about 50% year over year in the fourth quarter, mobile revenue as a percentage of total revenue doubled to 20% in the same period.

But is the growth all priced in?
Growth expectations are certainly priced in to Baidu's stock, but arguably not enough of Baidu's growth potential. Despite Google's much slower 22% year-over-year revenue growth of its stand-alone business, both companies trade at about 35 times earnings. The equal premium to earnings for both companies makes little sense given Baidu's faster-growing business. And amid one of the world's fastest growing smartphone markets and an aggressive plan by the Chinese government to make big investments in fixed-line and wireless broadband connectivity, Baidu's impressive top-line growth is likely to continue for a very long time.

Best of all, Baidu says the company will be more lucrative in the future. "[I]f I look a couple years down the road the scalability will kick in, the revenue will accelerate and that profit will follow," saidBaidu Chief Financial Officer Jennifer Li during the company's fourth-quarter earnings call.

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