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2-Star Stocks Poised to Plunge: Baidu?

Based on the aggregated intelligence of 170,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, Chinese search giant (Nasdaq: BIDU  ) has received a distressing two-star ranking.

With that in mind, let's take a closer look at Baidu's business and see what CAPS investors are saying about the stock right now.

Baidu facts

Headquarters (Founded) Beijing, China (2000)
Market Cap $39.3 billion
Industry Internet information providers
Trailing-12-Month Revenue $1.01 billion
Management Co-Founder/CEO Yanhong Li
CFO Jennifer Li
Return on Capital (Average Past 3 Years) 28.6%
Competitors Google (Nasdaq: GOOG  ) (Nasdaq: SOHU  )
SINA (Nasdaq: SINA  )

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.

On CAPS, 17% of the 5,367 members who have rated Baidu believe the stock will underperform the S&P 500 going forward. These bears include All-Stars Hotpicks101 and TSIF.

Earlier this month, Hotpicks101 touched on Baidu's seemingly unsustainable valuation: "Simply put this stock is priced for perfection right now. If there is any hiccup at all and/or if the market trades lower this stock will get hit hard from these levels. I think a more realistic price is around $70."

While most Fools agree that Baidu is a great business, it's the stock's lofty price tag that our community seems to have trouble with. Thanks in large part to the market share gains fueled by Google's exit from China, Baidu is up a whopping 174% in 2010. More importantly, Baidu's 100-plus P/E represents a massive premium to Google (32.9), as well as Chinese foes Sohu (16.2) and SINA (7.9). While it's true that Baidu may never be cheap, CAPS All-Star TSIF explains why it's not worth finding out:

[S]peculation on what it can achieve in China with Google in trouble with the Chinese government and China's growth rate continue to drive it upward with a P/E above 100. ... There are rare cases where a company's growth supports such metrics, but that company needs to have a moat that's wide. The dotcom bubble in 2000, however, shows us what can happen when the expections get FAR, FAR ahead of the reality and the moat is being showing in a carnival mirror out of proportion. Baidu has burned a lot of people playing them short. I think we're in a bubble.

What do you think about Baidu, or any other stock for that matter? If you want to retire rich, you need to protect your portfolio from any undue risk. Staying away from dangerous stocks is crucial to securing your financial future, and on Motley Fool CAPS, thousands of investors are working every day to flag them. CAPS is 100% free, so get started!

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Baidu, Sohu, and Google are Motley Fool Rule Breakers picks. Google is also an Inside Value choice, and the Fool owns shares of it. SINA is a selection of Stock Advisor. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (11)

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 October 28, 2010, at 11:43 AM, aloeveraw wrote:

    The members have been rating BIDU 2 stars in 2009. This is not new news. But look how BIDU performed.

  • Report this Comment On October 28, 2010, at 8:55 PM, Martin781 wrote:

    Fools fool I tell ya. Been hearing the same old story since 2007 when I bought it at $20. Still have most of my shares today. Why would I or anyone sell them now, it's the houses money anyway.

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