Will Baidu Hit $116.47 Next Month?

Baidu (BIDU 0.72%) finds itself in an unfamiliar place this year. China's leading search engine is playing from behind.

The stumbling dot-com darling has had a rough few months, finding itself trading at a year-to-date loss for the first time since 2008.

For those scoring at home, 2008 is the one and only year in which Baidu investors have lost ground since the company's IPO seven years ago.

Source: Yahoo! Finance.

Baidu went public at $27 in the summer of 2005, a figure that has to be adjusted down to $2.70 after a beefy 10-for-1 stock split in 2010.

The overseas speedster has been one of the market's biggest winners in its seven years of publicly traded life. It's been a 35-bagger for investors that were lucky enough to get in on the IPO. It doesn't feel like such a winning bet in recent months, but this is no 2008.

2012 is not the new 2008
It was a perfect storm for Baidu in 2008.

The three things that can bring a company down -- weak market sentiment, competition, and self-ineptitude -- were in motion.

On the market front, equities crashed in 2008 as the subprime mortgage crisis spilled into the street. The Nasdaq Composite cratered nearly 41% that year. Baidu shedding two-thirds of its value was far worse, but let's put that into its proper perspective. Despite the amazing rally in the equity markets since 2008's meltdown, Nasdaq is trading just 12% above where it was at the end of 2007. Baidu, despite having to dig itself out of a much larger hole, is up 152%.

On the competition front, Google (GOOGL -1.97%) was starting to get cooking in China. It had grown into a distant though legitimate silver medalist in the world's most populous nation. It wasn't until 2010 -- largely on political principle, but partly because it wasn't gaining ground on Baidu -- that Big G chose to stage a symbolic partial retreat out of the country.

Baidu also made its own bad luck. It was called out for accepting unlicensed pharmaceutical companies as top bidders for medical keywords. Owning up to the claim, Baidu stunned investors by revealing that up to 15% of its revenue was being generated this way. Baidu suspended the unlicensed advertisers, yet it still managed to grow at a healthy clip.

Today's snapshot
Baidu is in a much better place these days.

The market is holding up well, and many of China's Internet laggards are starting to bounce back this year.

Youku Tudou (NYSE: YOKU) -- China's largest video-streaming website operator -- is brandishing a double-digit gain after seeing its stock nearly cut in half last year. Renren (RENN) -- the company behind the country's top social networking site -- is flat this year after getting pulverized shortly after going public last year.

Baidu -- one of the few Chinese dot-coms to actually appreciate in value last year -- isn't suffered for a lack of favorable market sentiment.

Baidu also hasn't made any major bumbling black-hat moves of its own. The search giant has beaten Wall Street's profit targets in each of its past four quarters, though it did disappoint the market last time out by projecting fourth-quarter revenue that -- while up 38% to 42% year-over-year -- will mark a rare sequential dip for Baidu.

However, the same can't be said about Baidu's resistance to competition.

Qihoo 360 (QIHU.DL) turned heads this summer when it replaced Google as its search provider, rolling out an in-house solution. The platform has gained momentum, reportedly nibbling at Baidu's monstrous market share. Cautious analysts have turned on the company that has served longs so well in the past.

Qihoo 360 is nowhere near where Google was when it peaked in China a couple of years ago, but investors have always dreaded that any potential threat to Baidu would come from a hometown threat. Qihoo 360 puts out the country's most popular Web browser, giving it access to voluminous user traffic.

However, Google grew to dominate global markets long before the launch of the Chrome browser. We have also yet to see how Qihoo 360's popularity will react as the company steps up its monetization efforts.

Along the way, Baidu isn't fading away. Analysts see revenue and earnings growing 36% and 27% respectively next year. Trading at 16 times forward earnings is a historical low in valuation.

Yes, Baidu will still need to prove that it can grow nicely despite the fate of Qihoo 360's freshman engine. No, Baidu shares are unlikely to climb out of their 17% hole within the final five weeks of 2012. Investors are likely to suffer through what will only be the second down year in the company's seven-year history as a public company.

That's not so bad, especially since its sets the stage for a new streak of positive returns to begin come 2013.

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