Baidu (BIDU +2.45%) has gone from dot-com darling to dot-com dissed.
Jefferies analyst Cynthia Meng is the latest Wall Street pro to sour on China's largest search engine. She's slashing her price target from $135 to $125, while also lowering her firm's rating on the stock from buy to hold.
Why? You know why. Trumpeting the same bearish theme raised by ThinkEquity's Henry Guo last week and Deutsche Bank before that, Meng is concerned about the pesky presence of Qihoo 360 (QIHU +0.00%) as a search disruptor.
Meng feels that Baidu may come up short in its next quarterly report, noting that the page-view traffic on Baidu's search hub has fallen by 4%.
There are a few problems with that assumption. For starters, Baidu has beaten Wall Street's profit targets for 13 consecutive quarters. In other words, analysts have perpetually underestimated Baidu's earnings power. Another factor to consider is that the handful of analysts that have turned on Baidu in recent weeks are also lowering their own estimates. Three months ago analysts were betting on a profit of $1.31 a share in the third quarter. Now those same pros are looking for net income to clock in at $1.29 a share.
That's not all.
Qihoo didn't roll out its search engine until it booted Google (GOOG +0.25%) as its provider in August. Qihoo's reach is wide with its popular Web browser and anti-virus tools, so the move makes sense. However, we don't know if this will be novelty bump -- one that has pushed Baidu's market share down from 80% to somewhere between 75% and 80% -- or a troublesome trend.
Sohu.com's (SOHU +1.60%) Sogou has had several quarters where the small search engine grew faster than Baidu. Technically, that means that it's gaining on Baidu, but it's so far away that it doesn't make a difference.
Investors should approach this situation with caution. Buying into China has always been risky, and now there's the risk of disruption. However, cynics that have argued that Baidu is too expensive finally have the company trading at a forward earnings multiple in the high teens.
The upside and downside have never been greater.
Betting on China
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