Despite my recent stint as the devil's advocate in arguing against international investing, my portfolio doesn't lie. I own a mutual fund that specializes in small companies in developing countries. In an attempt to grow my conviction in growing markets, I also bought a stake in Baidu.com
I was careful enough not to buy the day it went public. You could have cut the froth with a knife as China's leading search engine neared its summertime IPO last year. Even though the stock was being offered at a mere $27 a share, comparisons with Google
Baidu's IPO proved to be one for the ages. The stock opened at $66 and soared as high as $151.21 before settling the day at the lofty $122.54 mark. As sanity descended on the market, the shares quickly dipped back down into the double digits.
I bought in two months after the IPO. I thought I was getting a fair price at $65.35, but I was indoctrinated quickly into the volatile ways of Baidu. Two weeks later, the stock topped $80. I was elated! Four months later, the stock had plummeted below $45. I was deflated!
More air, please
Last night's stellar report for the quarter ended in March shows the company huffing and puffing in the right direction again. The stock was trading as much as 23% higher in after-hours trading. Revenue soared 197% higher to hit $16.9 million. Earnings came in at $0.13 per American depository share -- or $0.16 per share including stock-based compensation. Analysts were expecting just $0.12 a share in profits on $15.1 million in revenue.
Things should heat up in the current quarter. The company did not provide bottom-line guidance, but it is looking for the top line to come in between $23 million and $24 million. Wall Street's model munchers were parked at the $17.6 million mark. Before the report, analysts were expecting Baidu to earn just $0.14 a share for the current quarter. If we assume that Baidu will deliver at least the 26% in net margins it generated this past quarter, Baidu will earn at least $0.18 a share before we add back in the stock-based compensation charges.
Over the next few days, you can count on firms to boost their profit targets for Baidu -- targets that, until Tuesday's perspective-altering glimpse, stood at $0.55 a share for 2006 and $0.98 per share come 2007.
Paying more than 70 times next year's earnings may seem pricey, but the company is growing at a pace greater than that. Everywhere you look, you will find opportunity for Baidu.
Good, but looking to get better
Net margins are up to 26% at the moment. That's impressive. It's in the ballpark of trailing net margins at other Chinese growth stocks, such as Sohu
With less than 10% of China online and per capita income and spending on a huge upswing, Baidu's earnings potential a few years further out could be explosive as long as it remains one of the top search engines. It's at the top now, and Google is a close second. But even if Google eventually overtakes Baidu, there will still be plenty of portal gravy to go around.
Attracting key publishers is a great way to draw important advertisers, and Baidu realizes it. It's doing everything it can to make sure it doesn't give up the pole position in the only race that matters. The company continues to expand its Baidu Union service that allows third-party sites to broadcast Baidu-sold ads. Going by traffic acquisition costs, Baidu's third-party program is growing faster than its organic spurts. That stands in contrast with how the past few quarters have been shaping up at Google, whose own network revenue has outpaced the growth at Google AdSense. In a nutshell, Baidu is quickly casting its net pretty far.
Scaling the Great Wall of opportunity
We live in a pretty big world, and it just doesn't make sense to ignore the globe's largest population. I do believe that the greatest investments in your lifetime will come from local stocks that you know inside and out, but there is a dynamic opportunity taking place in China.
Our Motley Fool Rule Breakers newsletter service has embraced the region by recommending that readers buy into NetEase and Shanda Interactive
Longtime Fool contributor Rick Munarriz speaks two languages fluently. Neither is Chinese. He does own shares in Baidu. The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.