Baidu Wins, As Usual

Baidu (Nasdaq: BIDU  ) still has it.

China's leading search engine has once again blown past Wall Street expectations, even as it invests in Japan while stateside players like Google (Nasdaq: GOOG  ) fall short.

Total revenues soared 111% to $78.3 million. Earnings climbed by 79% to hit $0.87 a share. Analysts were looking for a profit of only $0.71 a share on $77.1 million in revenues.

A few unusual factors influenced the bottom-line results. The company's investment in Baidu Japan set earnings back by $3.5 million, or $0.10 a share, while the company posted a favorable reinvestment incentive tax refund to the tune of $2.9 million, or $0.08 a share.

Even if you assume that Japan's hit is factored into Wall Street's profit targets and that the one-time tax benefit is not, Baidu still obliterated the market's net income estimates.

Sorry bears, you will live to growl another day.

The 77% gamble pays off
Earlier this week, I suggested that Baidu had a 77% chance of besting profit targets because that is exactly what the company had done in seven of its first nine quarters as a public company. Now that Baidu has lapped the pros in eight of the past 10 periods, I guess I'll be back in three months to sport Baidu with an 80% chance of clocking in ahead of the analyst community.

There will be challenges, though. The company's initial top-line guidance for the current quarter -- calling for total revenues to climb 93% to 99% -- is short of where the pros are perched. Baidu faults the wave of severe snowstorms in China earlier this year for biting into Web usage, as well as the seasonal slowdown around the Chinese New Year.

The company also is ramping up its expenditures in support of its recent launch of Baidu Japan. It expects to invest $20 million to $25 million in the venture this year, considerably more than the $10 million it spent last year.

Those are big numbers for a high-margin company like Baidu that milks a lot out of a little, but don't let the numbers dishearten you. Yes, the Baidu Japan investment will at least double this year, but Baidu's overall revenue growth is likely to nearly double, too.

The company isn't expecting material revenue out of Japan this year -- nor from its Chinese auction site set to launch later this year -- but Baidu is planting the seeds that will deliver diversified growth in the future.

The alternative to the drama
Baidu isn't cheap, but one should never expect to pick up a fast-growing category-killer like Baidu for a pittance. Trailing earnings are now $2.48 a share, pegging the shares with a lofty trailing multiple of 105 until you reconsider the company's stellar growth rates.

Baidu is trading at just 64 times forward earnings projections, but estimates are likely to inch higher after this report (even with the lower seasonal guidance for the first quarter).

I recommended Baidu.com as an investment to Rule Breakers subscribers 16 months ago. It has gone on to more than triple in that time. You want to know something that will blow you away? It was trading at more than 100 times earnings then, too. The stock simply kept pace with the profits, which have also tripled in that time.

Baidu isn't going away. It remains the search engine champ in China, well ahead of distant players like Google and Sohu.com's (Nasdaq: SOHU  ) Sogou. It doesn't need to make a dent in Japan -- a market dominated by Yahoo! (Nasdaq: YHOO  ) first, and Google second -- though it would be gravy given Japan's established Web economy.

A lot will happen over the next three months. As we inch closer to the Olympics, advertising plays like Baidu, Focus Media (Nasdaq: FMCN  ) , and airport advertiser AirMedia (Nasdaq: AMCN  ) will generate buzz over their prospects of commanding princely sums in getting advertisers showcased before global audiences.

However, the volatility that has rocked Chinese stocks will continue. It's going to go back and forth, though it's hard to argue against the end result being higher for companies that deliver better than expected results like Baidu has done more often than not.

So what are the chances of Baidu trading higher in three months? My unscientific yet mathematically honest internal hunch is riding on an 80% probability.

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