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Why Baidu Inc. Might Be Poised to Pull Back

By Brian D. Pacampara, CFA – Feb 27, 2014 at 12:52PM

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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 analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Morgan Stanley downgraded Chinese Internet search giant Baidu (BIDU 8.99%) from overweight to equal weight, suggesting that today's 2% earnings-related rally might be short-lived.

So what: Along with the downgrade, Morgan lowered its price target to $179.60 (from $185.40), representing just 4% worth of upside to yesterday's close. While Baidu's fourth-quarter revenue and current-quarter guidance topped Wall Street's expectations, Morgan thinks that short-term margin pressure will likely limit the stock's appreciation potential over the next year.

Now what: According to Morgan, Baidu's risk/reward trade-off is pretty balanced at this point. "We downgrade from OW to EW mainly due to a softer margin outlook in 2014 on heavier investments," Morgan stated in a note to clients. "We remain positive on Baidu's market position in PCs and its improving user penetration in mobile Internet services. Continuous sales expansion and potential cut back on discretionary spending may lead to margin stabilization." So while Baidu might face some short-term growing pains in 2014, long-term investors would do well to take Morgan's downgrade with a grain of salt. 

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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