It's time to jack up those Baidu
China's leading search engine (which is also a Motley Fool Rule Breakers pick) blew past Wall Street's third-quarter profit targets last night. Analysts were expecting a profit of $0.63 a share in Baidu's latest quarter. Earnings clocked in 113% higher to hit $0.70 a share, or $0.72 a share before stock-based compensation. If it wasn't for a $0.08-per-share loss in the company's new search engine initiative in Japan, adjusted earnings could have come in as high as $0.80 a share.
Revenue surged 108% higher to $66.3 million, also ahead of where the pros were parked. (Baidu hammered Wall Street estimates last quarter as well.)
What's behind all the growth? Perhaps the best way to explain this is to point out that the number of advertisers has grown from 102,000 to 143,000 over the past year. How can a 40% boost in sponsors create a 108% surge on the top line?
That's easy. Advertisers are spending a whole lot more on Baidu. You see this trend happening sequentially, but it's magnified even more when you step back to analyze it on an annual basis.
China's hot economy is enriching its citizenry. With more people migrating to the Web with more money to spend, it's easy to see why sponsors continue to spend more and more on Baidu to generate quality leads.
No one even comes close to Baidu in China; the company commands a thick 58% slice of the search-engine market. However, Google
Investors have enjoyed the ride, even with dizzying valuations that make profit-taking a natural occurrence even after a blowout report like last night.
Speaking of valuations, it's time to raise the bar. The company is looking to grow revenue by 106% to 112% in the current quarter, or $74.7 million to $76.7 million. That's in the ballpark of where Wall Street is presently perched, but analysts also expect the company to earn $0.70 a share for the quarter. If that is what Baidu earned on $66.3 million, just imagine what it could earn on $76 million. If margins come in at the impressive 36.6% mark it mustered this time around, profits could come in as high as $0.80 a share.
Granted, it won't be an easy road to another market-thumping quarter (the company has missed Wall Street's profit targets just once since going public two years ago). Spending in Japan will continue as it looks to take on Yahoo!
However, with next year's Olympic Games in Beijing likely to stir up even more Web usage and higher keyword bidding among sponsors in the coming quarters, it's hard to bet against popular Chinese sites like Sohu.com
Yes, Baidu may be priced richly at 88 times next year's earnings, but with heady growth and solid fundamentals, is it any wonder that the ceiling is getting perpetually higher?
For more on Baidu:
Baidu and NetEase are selections in the Rule Breakers growth-stock newsletter service. SINA and Yahoo! are Motley Fool Stock Advisor recommendations. Find out why with free 30-day subscription offers to either newsletter.
Longtime Fool contributor Rick Munarriz has been to mainland China just once, but he's longing to brush up on Mandarin and give it another go. He does not own shares in any of the companies mentioned in this story. Rick 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.