4 Reasons to Believe in Baidu

Baidu (Nasdaq: BIDU  ) investors are nervous heading into Wednesday's quarterly report. It's easy to see why. Stateside bellwether Google (Nasdaq: GOOG  ) posted a rare miss during the same period. Investor appetite for Chinese shares has also been waning, with Baidu's stock off by a bitter 45% since peaking three months ago.

I recommended the stock to Rule Breakers subscribers -- at one-third of today's price -- 16 months ago.

I'm not worried. I have four reasons to explain why I'm at ease.

Baidu is not tied to Google's hip
It's hard to avoid comparing Baidu to Google. Baidu's market share dominance in China is similar to Google's peer-thumping position closer to home. If you had to sum up Baidu, in three words or less, to someone unfamiliar with the company, who wouldn't lean on "It's China's Google," and leave it at that?

The problem is that we're talking about two different markets. The U.S. has a mature Internet audience and an iffy economy. China's is significantly earlier in the Web's adoption cycle and that country's economy is growing at a healthy annualized clip of better than 10%.

Don't take my word for it. Let history be your guide. Google's previous quarterly miss happened during last year's second quarter. Big G earned $3.56 a share, just shy of the $3.59 share in profitability that Wall Street was expecting.

Was Baidu doomed? A week later, China's search engine star earned $0.54 a share, obliterating Mr. Market's profit target of $0.43 a share.

Sympathy plays don't hold a whole lot of water when you're talking about fast-growing players on the other side of the planet. China's Ctrip.com (Nasdaq: CTRP  ) has been a speedster, even as many stateside travel portals plod along. You would be nuts to project a domestic hotelier's shortcomings on the growth story of China's Home Inns  & Hotels (Nasdaq: HMIN  ) .

Beating the pros is in Baidu's DNA
Baidu has missed analyst projections only once since it went public three summers ago. In one quarter the company simply met expectations. Those have been the exceptions to the rule. So in seven of its first nine quarters as a public company -- or 77% of the time -- Baidu has delivered net income that handily exceeded Wall Street's expectations.

It's not a perfect trend. However, it certainly helps handicap this week's upcoming report in Baidu's favor.

Microhoo drama needs another star
The roller-coaster romance between Microsoft (Nasdaq: MSFT  ) and Yahoo! (Nasdaq: YHOO  ) has centered mostly on Google's reaction to the rocky nuptials. The media portrayed Microsoft's quest to nab Yahoo! as the Web's third-leading search engine hooking up with the silver medalist to make a run at Google's gold. That is accurate domestically but a vast misrepresentation globally.

Take a look at the world stage, and it's actually Baidu that is fit to be bronzed, with Microsoft far behind the medalist podium.

December Worldwide
Market Share

Google

62.4%

Yahoo!

12.8%

Baidu

5.2%

Microsoft

2.9%

Everyone Else

16.7%

Source: comScore qSearch 2.0.

What does this mean for Baidu? Well, let's just say that Baidu can win in many ways here. Whether it's about higher valuations within the sector or Baidu gets ensnared in the buyout rumor mill -- especially if Microsoft is unable to wrest Yahoo! away and settles for the far more affordable Baidu -- Baidu wins, and the importance of search engine superiority takes center stage in the financial markets.

Fears of Baidu overspending are overblown
When Canaccord Adams analyst Colin Gillis upgraded Google and downgraded Baidu two weeks ago, his premise was that Baidu was vulnerable because it was earmarking funds for its character search expansion into Japan.

Because it was Google's report that proved costly on the corporate expenditures front, he might have backed the wrong horse.

"I'm not worried about Baidu bankrolling expansion," I wrote at the time. "The company spent money on these initiatives last year, and it still blew past analyst estimates. Just take a look at Baidu's third-quarter results. The company earned $0.72 a share before stock-based compensation expenses. That includes an $0.08-a-share loss in Japan. Did the market spit the stock out? No, because the weak-armed analysts were looking for Baidu to earn just $0.63 a share during the period."

Baidu has developed dozens of sticky applications for its Chinese site over the years. That has certainly not slowed the income statement's market-topping quarterly spurts. Yes, Japan will be a costly market if Baidu wants to get it right, but Baidu has proven that it can balance its R&D with shareholder expectations.

Add it all up and I'm not worried about Baidu, especially as the world's most populous nation heads into its most important year with the Olympic Games this summer in Beijing.

Baidu will beat the pros. How sure am I of that happening? Oh, about 77%. Excellent odds.

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