Dueling Fools: Baidu Bull

How do I search thee? Let me count the ways. In China, that's the real challenge. It's more than just trying to develop a search engine that incorporates the thousands of characters that make up the language. You also have to deal with subtle complexities. For instance, there are at least 38 different ways to say "I" in Chinese.

Don't turn to me for help. My fluency ends at English and Spanish. Thankfully, you don't need me when you have Baidu.com (NASDAQ:BIDU).

It's not fair to simply label Baidu as the market-share leader. With its whopping 62% of the market, no one else even comes close. The second most popular choice is Google (NASDAQ:GOOG), yet Big G's market share has shrunken from nearly a third of the market in China to a mere quarter over the past year.

Is Baidu better? Perhaps. Is the world's most populous nation simply siding with the home team? Not necessarily. Keep in mind that other local favorites like SINA (NASDAQ:SINA) and the Yahoo! China initiative backed by Alibaba and Yahoo! (NASDAQ:YHOO) haven't exactly put a dent in Baidu's pie. Earlier this month, Yahoo! China announced a retreat, repositioning its search engine as a business-oriented niche service.

It's easy to understand why everybody is gunning for Baidu. According to Piper Jaffray, China's 123 million Internet users will engage in 813 million daily searches this year. If that sounds beefy, consider that less than a tenth of China's population is actually online. Couple that with an economic boom in the region that has sent the country's GDP soaring at a 10% annualized clip in recent years, and it's clear why Wall Street is smitten: Baidu is the new sexy.

Does that make its share price seem a bit rich? I guess that Tim Beyers may argue as such this week. I just don't see it that way. Sure, Baidu's shares have come a long way, but it's not as if the fundamentals have failed to deliver on their end of the bargain.

Let's look at how Baidu has fared in each of its first five quarters as a public company.

Save for the March quarter that found Baidu missing its bottom-line target by a penny, the company has clocked in ahead of Wall Street by at least 17%. Baidu and China are growing a lot faster than analysts had projected, and I just wouldn't want to stand in front of that kind of grinding momentum.

Baidu isn't just getting lucky. If anything, it's giving the pros a decent shot to catch up every three months, and Wall Street is still coming up short. Five months ago, analysts figured that Baidu would earn $0.81 a share in 2006 and $1.52 per share in 2007. Today? We're looking at $0.96 in trailing and $1.75 in forward profit projections.

Does Baidu appear rich at 126 times last year's earnings or 69 times this year's consensus forecast? Only if you ignore the likelihood that future targets will ratchet higher and that a rapidly improving Chinese economy will send paid-search rates soaring.

No, Baidu is not for the weak of heart. Despite recent moves to clean up its act in music searches and its desire to move into the affluent Japanese market, some investors won't budge when they see sky-high ratios.

Then again, those are the same investors who scoffed at Baidu as unproven and marginally profitable when the company went public in the fall of 2005 -- $27 seemed to be too much to pay, even though getting in on the IPO would have meant buying Baidu at just 15 times 2007 earnings. Did they know that Baidu was trading at such a reasonable market multiple? Of course not. Analysts didn't realize two years ago what they realize today. Something tells me that they will be kicking themselves in another two years, when they look back at what they falsely assumed was outrageously overpriced today.

Just exactly how many ways are there to say "regret" in Mandarin?

You're not quite done yet! To see the bear argument and the rebuttals, click here. If you've already read everything, cast your vote for the winner here.

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Longtime Fool contributor Rick Munarriz has been to mainland China just once, but he longs to brush up on his Mandarin and make it another go of it. He does not own shares in any of the companies mentioned in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. Yahoo! and SINA are Motley Fool Stock Advisor recommendations. The Fool has a disclosure policy.