3 Questions for Baidu in 2011

It's been a good run for Baidu (Nasdaq: BIDU) and its investors in 2010. The stock has more than doubled on the heels of market share-gobbling growth and a booming Chinese economy.

Baidu is making the most of being the undisputed search engine champ in the world's most populous nation. The stock has been better than a 10-bagger since I recommended the Chinese speedster to Motley Fool Rule Breakers newsletter subscribers four years ago.

Baidu leaves 2010 with healthy momentum, but also plenty of questions that will need to be satisfactorily answered for the rally to continue.

Let's go over the three burning queries.

1. Is Google out for good?
The biggest catalyst behind Baidu's run this year has been Google's (Nasdaq: GOOG) decision to stage a partial retreat instead of continuing to censor the Google.cn domain. The move may have scored it some serious karma points with the outside world, but it has ultimately translated into fading relevance for Big G in China.

Baidu has been gaining market share at Google's expense. This could have been the perfect opportunity for a third player to step in, but Microsoft's (Nasdaq: MSFT) Bing and Sohu.com's (Nasdaq: SOHU) Sogou have failed to overtake even a fading Google.

Can the market dominance continue? Is Google due to bounce back either by conceding the point or China's government loosening its restrictive grip on acceptable search query results? This will play a big role in Baidu's direction during the year ahead.

2. Can the positive earnings surprises continue?
Bears love to point out that Baidu trades at lofty valuations, but it's a rolling argument that has proved hollow in the past.

Of course, Baidu is richly priced. This is a company well on its way to grow its earnings per share by a whopping 135% this year, and a still impressive 60% that is targeted for 2011. Baidu closed yesterday at 42 times next year's projected earnings. That's rich, but it's still growing even faster.

Smarter growth investors also know that the $2.37 a share in earnings that analysts are expecting for the year ahead may also be less than what it ultimately earns -- meaning that the forward P/E multiple is actually even cheaper.

Let's go over the last four quarterly profits out of China's top dog in paid search:

Source: Yahoo! Finance.

Can you see the trend? Do you feel the momentum? Baidu has earned an average of 15% more than what Wall Street has been banking on in each of the past four quarters. Even slapping a 15% premium to the $2.37-a-share bottom-line target isn't just, because these are quarterly performances. Every three months, Baidu has landed ahead of the pros so Mr. Market has no choice but to ratchet his guesstimate even higher.

Unfortunately for the bulls, there are no guarantees here. Baidu has come up short in the past. It may very well stumble in the future. A lot of the factors that helped deliver a killer 2010 -- from Google's departure to Baidu's shift to a Google-esque Phoenix Nest platform -- already happened.

History makes it a fair bet that Baidu will blow past expectations, but actually achieving that feat -- and by how much -- will be another key driver in 2011.

3. Can Baidu grow substantially beyond search advertising in China?
Baidu never stands still. Over just the past few weeks, it has launched a Groupon-esque group-buying site and a microblog platform to take on SINA's (Nasdaq: SINA) fast-growing Weibo.

Baidu also decided to cash in on its character-language prowess by launching in Japan three years ago.

This all sounds great in theory, but where's the Mongolian beef? Baidu hasn't been able to make much of a dent in a Japanese market dominated by Yahoo! (Nasdaq: YHOO) and Google, largely posting losses there since its debut.

Web 2.0 ventures closer to home are intriguing, but can they be effectively monetized? Baidu introduced a video-sharing site earlier this year. Niche leader Youku.com (Nasdaq: YOKU) is losing money, with negative gross margins to boot. Don't wait up for Baidu to score mad profits here.

The silver lining here is that Baidu doesn't need a second act. Paid search is a lucrative business, and there's still plenty of room to grow. The substantially larger Google still relies mostly on paid search.

However, the upside is also there if any of Baidu's non-search initiatives catch on in a way that can be seamlessly monetized.

It's going to be an interesting 2011 for Baidu, but investors already know that.

What do you see as the major bullish or bearish catalysts for Baidu in 2011? Share your thoughts in the comment box below.