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Why Baidu Inc. Rallied This Morning

By Brian D. Pacampara, CFA – Feb 24, 2014 at 9:30AM

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Does this analyst make a good case? Or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Baidu (BIDU 8.99%) popped 2% in pre-market trading after Goldman Sachs upgraded the Chinese Internet search giant from neutral to buy.

So what: Along with the upgrade, analyst Piyush Mubayi boosted his price target to $220 (from $160), representing about 27% worth of upside to Friday's close. While value investors might be turned off by Baidu's strong return over the past year, Mubayi thinks there's plenty of room to run given its strengthening position in new segments, as well as its rapidly progressing mobile monetization.

Now what: Goldman now expects Baidu to post non-generally accepted accounting principles operating margin of 39% in 2014. "Its investments in the past years, while costly, have earned Baidu a leading position in map services and location-based technology," Mubayi noted. "Moreover, mobile search monetization is progressing fast. By 4Q13, we estimate that 20% of Baidu's search revenues will come from mobile, leading to operating leverage against a relatively fixed cost structure." When you couple that bullish view with Baidu's strong balance sheet and reasonable PEG of 1.3, it's tough to disagree with Goldman's upgrade. 

Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends Baidu. The Motley Fool owns shares of Baidu. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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