The stock of Chinese Internet search engine Baidu.com (NASDAQ:BIDU) fell $32.27 (28.41%) to $81.32 a share Wednesday on news that two brokerage firms have initiated coverage of the stock with "underperform" ratings. I agree with the analysts: Baidu is overpriced.
MarketWatch is reporting that neither brokerage is questioning the company's business model or the potential for success. But both see the stock as overvalued. In fact, one analyst values the stock at around $27, and both say $45 would reflect an aggressive valuation. To reach $45, the stock would have to fall an additional 48% from today's low! Heck, the stock hasn't traded below $60 since the company's initial public offering (IPO).
Baidu's IPO, a little more than a month ago, is already legendary. The stock, offered at $27 a share, opened for trading at $66 and promptly soared to $151.21 -- a whopping 460% gain. The stock eased back to close at $122.54, a still-impressive 350% gain for the day.
What is a company worth that will double its revenue this year to something short of $40 million? I doubt anyone shouted out $2.6 billion -- the current market capitalization. Nor would many offer $1.5 billion, the market capitalization for its 32.3 million shares at $45 a share.
What makes this valuation so tough is that China's top search engine company is frequently compared to Google (NASDAQ:GOOG), which trades in rarefied air. Its price-to-sales ratio is 19.4. That's pricey. But with sales of less than $15 million last year, the company -- at today's valuation -- currently trades at roughly 175 times sales. Yikes!
Now, of course, Google and Baidu are at different maturity levels and predominantly operate in different markets. But let's look at it hypothetically, just to see what Baidu would need to do to justify its valuation. We'll work under the assumption that Google is fairly valued, although some might argue otherwise. To get to a price-to-sales level approaching Google's, Baidu would need to increase revenue by 100% a year for three years, maybe a little more. And I just don't think that's too likely.
Competitors like Yahoo! (NASDAQ:YHOO) and Microsoft (NASDAQ:MSFT) are also trying to get a foothold in China, which will put downward pressure on ad prices, and it's likely that more competition will emerge as the Chinese Internet user tally grows.
So as justification goes, I'm not finding it. Look elsewhere, folks.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see the Fool's disclosure policy.
