And if you think Google is volatile, you haven't seen some of the wild swings that China's leading search engine can put its investors through over the course of a single day.
Take yesterday, for example. The shares opened at $347.07, traded as high as $359.45, and wrapped up the trading day at $308.78. It may seem like a brutal day -- and it was -- yet the stock has still doubled off its summertime lows.
What fueled Baidu's 10% slide yesterday was a sobering note by JPMorgan Chase analyst Dick Wei. He feels that the company's third-quarter revenues -- which will be announced in two weeks -- will clock in at $67.5 million. Wei was originally looking for the top line to clock in at $67.9 million.
Is a $0.4 million miss on the top worth a $1 billion market cap whack? More to the point, even Wei's $67.5 million target is well ahead of the $65.5 million that Wall Street has set. So if he's right, Baidu will actually beat the market's revenue expectations. A top-line win on Baidu's fat margins bodes well for a company that has flown past Wall Street's profit targets in six of its first eight quarters as a public company.
"Any share price pullbacks on the back of these short-term issues offer an excellent buying opportunity for the leading Chinese search engine," Wei wrote.
Wow! Talk about a self-fulfilling prophecy.
As the Baidu grows
Baidu isn't taking anything for granted. Sure, it owns 58% of the search engine market in the world's most populous nation. Google commands a distant second with its 23% slice. It knows that it can't take the Google threat lying down.
The Wall Street Journal is reporting this morning that Baidu is opening R&D centers in Tokyo and Shanghai. Why Tokyo? Well, Baidu quietly entered the Japanese language search engine market this year. Why Shanghai? Well, Baidu wants to make sure it can recruit China's top college graduate engineers. Keeping the centers apart will make sure that each one can dedicate itself to excelling within its own language.
Focus is important. It may very well be what found Yahoo!
That's a concept that Baidu bears have a problem embracing. I recommended Baidu to Rule Breakers subscribers a year ago at $83.37. The stock has nearly quadrupled. I'm obviously proud of the pick. (I'm also proud of my new pick in the upcoming November issue that will go out to subscribers next Wednesday.)
I'm often asked if Baidu is still worth buying. It's still on the subscriber scorecard. That's the answer right there. However, my own bullishness should never dissuade a Baidu bear from speaking out on the newsletter's discussion board.
Bears on the Colbert Threatdown
Case in point? A concerned subscriber chimed in yesterday, worried that Baidu's rise is starting to parallel the Tech Bubble of 2000.
"Sell this stock from your scorecard today, and book some hefty gains," he advises.
He points out the valuation concerns, with Baidu's trailing P/E approaching 200. He also feels that Baidu's market leadership can also be its ceiling.
"It already controls 60% of Chinese market, and it's fair to assume that that's the saturation point in China," he writes.
I disagree. The assumption that it can't get any better assumes that the size of the pie stays the same. That's unlikely.
China is a country blessed with 1.3 billion, but few have online connectivity. The China Internet Network Information Center estimates that just 162 million residents -- or 12% of the country -- have Internet access. The disparity is huge. Last month's study had urban penetration at 22%, with rural access chiming in at a mere 5%. So even if Baidu commands 58% of the search engine market, it's actually just 7% of the entire potential market.
That certainly leaves a lot of upside -- and not just for Baidu but for Google, too. Other companies with a strong Internet presence in China like NetEase.com
Then you have China's economy, which is growing at a 10% clip or better for several years in a row now. How can you fight against a trend that finds a country of 1.3 billion migrating online, with ever-greater per capita spending power?
That's right. Valuation. Baidu is trading at nearly 200 times trailing earnings. That's pretty rich. Let's bail.
No. Why don't we sit for a minute and think about this. Baidu is growing quickly. It's only trading at 83 times next year's profit target (a target that the company has easily surpassed, as I already noted, in all but two of its quarters as a public company). Let's say that earnings growth slows from the 70% clip that Wall Street is expecting next year. What if Baidu grows at a 50% annualized clip over the following five years? At that pace, the company would earn $28.78 a share by 2013.
Buy Baidu at 11 times earnings that are six years away? That's the kind of far-reaching argument that would have me howling in the corner. A finish line that far away sounds desperate! However, there's little reason to believe that it won't happen.
Baidu doesn't need market share gains to grow. It hasn't grown its market share much over the past year, yet earnings have still more than doubled. What if the 50% bottom-line growth holds true? What would you pay for a 50% bottom-line grower? If 50 times earnings is the PEG-powered answer, you have a stock that will quadruple in six years.
How can that not beat the market? How can that not warrant sticking around on a scorecard?
Oh, I'll keep watching Baidu for cracks. This story may very well come undone along the way. Until then, where's the flaw in my logic? Let me know on the Rule Breakers discussion board for Baidu. If you're not a subscriber, go for a free 30-day trial subscription to let me have it all month long.
Even after the recent gains and yesterday's tumble, Baidu is still one of the best growth stock stories I know.
Other Baidu business:
Baidu was singled out to Rule Breakers readers less than 12 months ago and has already gone on to nearly quadruple. NetEase.com is another Rick pick in the same newsletter. SINA and Yahoo! have been recommended to Stock Advisor subscribers. Why are you missing out on these great stock picks? The answer may be waiting in free 30-day passes to any or all of the newsletters.
Longtime Fool contributor Rick Munarriz has been a fan of China's growth stocks for several years now, even though he does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.