In its first quarterly report as a public company, Baidu.com (NASDAQ:BIDU) did its best to silence its critics. Revenues rose by 189% to hit $8.5 million as net profits came in at $1.5 million -- or $0.05 per American Depositary Share.
Those numbers may not look like much, especially for a company commanding a whopping $2.7 billion market cap, but no one is buying into China's leading search portal for where it's been. It's where Baidu is going that has some investors tickled.
Baidu is serving the world's most populous nation, yet 1.2 billion of China's 1.3 billion residents are not yet online. What's more, per capita income in China is running a mere $1,300 a year.
Perhaps that's why advertisers spent an average of just $195 apiece to reach Baidu's multitude of visitors this past quarter. That's not a knock. It's an opportunity. After all, do you expect Internet usage in China to rise or fall over the next few years? Do you expect per capita income to rise or fall over the next few years? If you chose "rise" on both counts, you can begin to appreciate the beauty of Baidu.
This isn't to say that you can't admire the Baidu of today. Growth is stunning, and net margins of 17.6% are spectacular for a company this early in its growth cycle. However, margins are also likely to expand as the company grows. Between China's modest tax bites and lean operating expenses, you will find some pretty explosive margins in some of the country's leading public players.
NetEase (NASDAQ:NTES) knows how to flow nicely to the bottom line. Of every dollar that the company generated in sales this past quarter, an amazing $0.58 survived in profit. Leading online gaming specialist Shanda Interactive (NASDAQ:SNDA) produced net margins of 41% for the same period. Wireless Internet player Tom Online (NASDAQ:TOMO) -- 24%. Sina (NASDAQ:SINA) stumbled this past quarter, yet it was still good for 22% in net profit margins.
So, yes, Baidu's margins are impressive as a whole -- but not relative to many other Chinese stocks. Considering that online search is one of the higher-margin sectors in the U.S., with companies such as Yahoo! (NASDAQ:YHOO) and Google (NASDAQ:GOOG) producing so well, there is no reason why Baidu's net revenues can't one day produce some of the richest margins in China.
So is Baidu overpriced? Looking back, probably. Looking ahead, maybe not. Consider the very likely possibility of growing Internet usage in China, more disposable income per resident, and the inertia toward higher net margins. As long as Baidu remains the top dog in China -- and that's never a safe assumption -- Baidu's a triple threat to continue its winning ways.
That's growth. That's ultimate growth. That's why two of the seven companies in this article -- Shanda and NetEase -- have already been recommended in our Motley Fool Rule Breakers newsletter service. One of them is even trading 40% higher since being singled out earlier this year.
So let the cynics scoff at Baidu. They have a case for their bearishness -- assuming that they aren't looking ahead as well.
Longtime Fool contributor Rick Munarriz speaks two languages fluently. Neither is Chinese. He does not own shares in any of the companies mentioned in this story. T he Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
