Here's Why Baidu Is Ready to Bounce Back

The swift rotation out of tech darlings hasn't been limited to stateside titans. Baidu (NASDAQ: BIDU  ) -- China's leading search engine -- has seen its stock tumble 20% since peaking last month, but at least one analyst sees this as a compelling buying opportunity.

CLSA issued a bullish note on the Chinese bellwether this morning, arguing that Baidu's top-line growth could exceed expectations. Revenue growth has been accelerating lately. Baidu grew its revenue by 39% during last year's second quarter, followed by a 42% spurt in Q3, and a 50% advance in its most recent quarter. 

Back in February it was targeting a 55% to 60% top-line spike for the quarter that ended last week. Sustaining growth at these lofty levels isn't easy for a company the size of Baidu, but actually accelerating that rate is pretty spectacular, especially given the competitive climate that has evolved with a visible challenger in search -- Qihoo 360 (NYSE: QIHU  ) -- for the first time in years.

Qihoo 360 wasn't even in the search market until two years ago when it decided to take advantage of its popular Internet browser and security software suite to funnel traffic into its own search-engine platform. It's been gaining steam as an alternative to Baidu. Chinese traffic tracker CNZZ reports that Qihoo 360's market share in search has grown from 10.4% at the end of 2012 to 22.5% by the end of last year. A little more than half of those gains have come at Baidu's expense, as CNZZ has its share of the market in terms of page views sliding from 63.1% to 71.7% through the course of 2013.

With Qihoo 360's president publicly targeting a 35% chunk of the market by the end of this year, is it really prudent to be calling for Baidu to deliver an upside surprise in revenue growth? Absolutely. Relinquishing market share is typically a red flag, but it ignores that growth of the market, and Baidu's ability to get advertisers to pay more. All the proof one needs is eyeing Baidu's growth with every passing quarter during the past year at a time when it was reportedly losing share.

CLSA analysts aren't just guessing. After touring China's leading ad agencies and Internet companies, they feel that Baidu's dominance remains secure at a time when advertisers are spending more to get noticed online. They also sees Baidu making inroads in mobile search, something that seemed to be its Achilles' heel before it acquired a leading mobile apps marketplace operator last year.

Baidu isn't perfect. After years of consistently beating Wall Street's profit expectations, we've seen it prove mortal more often than not during the past year. Margins contracted as Baidu expanded into areas not as lucrative as paid search. However, after a sharp 20% correction during the past month, it's time to get opportunistic about a dot-com giant that is so much more than just a search company these days.

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