Baidu: More Buy Than Due

Shares of Baidu (Nasdaq: BIDU  ) are barreling toward all-time highs, after China's leading search engine delivered a blowout first quarter.

Revenue climbed 60% to $189.6 million. Earnings soared 165% to $2.02 a share. Analysts figured that the company would earn just $1.50 a share on $180.1 million in revenue.

Better yet, the company is targeting $268.1 million to $274 million in revenue for the current quarter -- 67% to 70% ahead of last year's showing. Now that's accelerating sales growth! Analysts figured that revenue would only grow at a 49% clip, to $240.1 million, for the next quarter.

Frankly, I feel dumb now. I was cautious of the stock's valuation in light of its torrid run since Google (Nasdaq: GOOG  ) bowed out of China.

But I'll bet Credit Suisse's Wallace Cheung feels even dumber. The analyst had the guts to downgrade Baidu, just two days before its monster report. Who would do that? Baidu had blown past Wall Street estimates in each of the three previous quarters, so the chances were better than fair that it would make mincemeat out of the pros' models.

A report from Chinese online traffic-watcher Analysys International earlier this week also pointed to strong results for the search site. It showed that Baidu gained market share during the quarter not only at Google's expense, but also against smaller engines such as Sohu.com's (Nasdaq: SOHU  ) Sogou and Tencent's Soso.

Search Site

Q1 2010

Q4 2009

Baidu

64%

58.4%

Google

30.9%

35.6%

Sogou

0.7%

1%

Soso

0.4%

0.7%

Others

4%

4.3%

Source: Analysys International.

Who can stop Baidu now? Google's search engine retreated to Hong Kong. There's an opportunity for Microsoft's (Nasdaq: MSFT  ) Bing to play by China's rules, but that may take years to gel. Advertisers know that they have to go through Baidu if they want to reach China's online audience.

I recommended shares of Baidu to Motley Fool Rule Breakers subscribers at $83.37 nearly four years ago. They're sitting pretty, but what about today's potential investors? Even if we look ahead to 2011's estimates, Baidu closed yesterday at a lofty 41 times next year's projected profitability.

That's not cheap, and now we have today's pop to factor into the price. However, keep in mind a few things:

  • Earnings targets will likely head higher, the way they have with all of Baidu's beats.
  • If recent history repeats, Baidu will land ahead of even the higher estimates.

Is Baidu cheap? No. However, it didn't seem conventionally cheap when I first singled it out at $83.37. Stocks that trade at deserved premiums remain expensive. Paying up for quality? What a concept!

Is Baidu overvalued? It is safe to buy into China these days? Share your thoughts in the comments box below.

Microsoft is a Motley Fool Inside Value selection. Baidu, Google, and Sohu.com are Motley Fool Rule Breakers picks. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has only been to China once, but he admires its dot-com revolution from afar. He does not own shares in any of the stocks in this article. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 29, 2010, at 12:21 PM, Fool wrote:

    I must admit that after today's earnings announcement, I sold my shares of BIDU.

    I didn't get in quite as early as Rick, but I did buy at $200 and pocketed quite a nice return. Even though BIDU continually destroys the estimates that Wall Street gives them, I have to wonder where they can go from here. They already command 75% of the internet search traffic in China and have 64% of the industry's market share.

    I attended the company's conference call yesterday, where Robin Li (Baidu's CEO) maintained that the stock's appreciation was due to the launch of the Phoenix Nest platform and operational improvements of the company. But I don't buy it. BIDU is in the position that it is right now because NO ONE is competing with them. Google's 'exit' from China directly translated to BIDU's gain, and there are no other players right now that are ready to join them on the big stage.

    I'm not convinced yet that Sohu or Soso is the answer in China, but BIDU's growth parade can't last forever. And I'll be taking my money out before the rest of the market picks up on that.

  • Report this Comment On April 29, 2010, at 12:21 PM, Fool wrote:

    I must admit that after today's earnings announcement, I sold my shares of BIDU.

    I didn't get in quite as early as Rick, but I did buy at $200 and pocketed quite a nice return. Even though BIDU continually destroys the estimates that Wall Street gives them, I have to wonder where they can go from here. They already command 75% of the internet search traffic in China and have 64% of the industry's market share.

    I attended the company's conference call yesterday, where Robin Li (Baidu's CEO) maintained that the stock's appreciation was due to the launch of the Phoenix Nest platform and operational improvements of the company. But I don't buy it. BIDU is in the position that it is right now because NO ONE is competing with them. Google's 'exit' from China directly translated to BIDU's gain, and there are no other players right now that are ready to join them on the big stage.

    I'm not convinced yet that Sohu or Soso is the answer in China, but BIDU's growth parade can't last forever. And I'll be taking my money out before the rest of the market picks up on that.

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