Blue, Blue Baidu

Gravity has been cruel to Baidu.com (Nasdaq: BIDU) in recent weeks. The same stock that was barreling past the $400 mark just last month is now trading 38% off its highs.

Investors may be scratching their heads, especially since the sell-off hasn't been triggered by a wave of negative news. Baidu's CFO died while on vacation last month, but that's hardly a bear-rousing event.

Baidu remains well ahead of Google (Nasdaq: GOOG) as China's leading search engine. Baidu emerged victorious in a music-related lawsuit recently. Just last month it was tapped for induction into the NASDAQ-100 Index, the first Chinese company to be added to the popular stateside tech stock gauge. Chinese display advertising titan Focus Media (Nasdaq: FMCN) was added a few days later.

The only legitimate valuation-altering event would appear to be quarterly earnings, but the company isn't set to report again for another four weeks. Besides, that has typically been a source for bragging rights at Baidu.

The company has beaten analyst expectations by a double-digit percentage margin in three of the past four quarters. The lone exception found Baidu simply meeting expectations.

Wall Street isn't concerned about Baidu's next quarterly report. It's even less worried about the future. When Baidu was trading at its all-time high several weeks ago, the consensus estimate called for Baidu to earn $4.04 a share in 2008. Wall Street's projection is now up to $4.12 a share.

With rising estimates and falling share prices as passing ships, Baidu is now trading at 64 times forward earnings. That may not be enough to woo lip-licking vultures (do vultures have lips?) but it should be attractive for growth stock investors.

When I'm 64
When is 64 times forward profitability cheap? Well, Baidu's earnings more than doubled last year, with the pros looking for a 76% surge in 2008. Lower multiples abound in China. Web-heavy players like Ctrip.com (Nasdaq: CTRP), SINA (Nasdaq: SINA), and Sohu.com (Nasdaq: SOHU) fetch between 26 and 44 times forward net income targets, but they are also not growing as quickly as Baidu.

So why is the market bailing on Baidu? It's a fair question. As the poster child for China's booming stock market since its IPO nearly three years ago, it's an easy target. If market sentiment has soured on China -- the way it has in recent weeks -- weak hands and institutional investors are quick to wipe Baidu off their scorecards.

The rub here is that ultimately, fundamentals price any company. Baidu's fundamentals have actually improved. You see it happen with every passing quarter, as analysts nudge projections higher. You're also seeing it happen within this actual quarter when it comes to Wall Street's expectations for 2008.

Passing ships, passing chips
It's a paradoxical opportunity. U.S. investors might have cooled on Chinese stocks -- evident by the recent IPO debacles -- but the number of China's bellwethers increases as the country's economy booms.

You see it in more than only Baidu. Remember when Home Inns (Nasdaq: HMIN) went public two years ago? The budget lodging hospitality chain might have seemed insanely priced with a triple-digit P/E multiple. The stock has shed nearly half of its value over the past year, even as its earnings outlook continues to improve. Earnings are supposed to more than double in 2008, yet the stock is trading at just 35 times forward profit estimates.

Passing ships, indeed. Eventual opportunity, indeed. The near-term apathy when it comes to Chinese equities is beyond the individual equity's control. All that the companies can do is deliver the goods, fiscally speaking, counting on pessimism to stretch back share prices like a slingshot's rubber band, ready to bounce back. The harder you pull, the bigger the boing.

Will Baidu investors patiently wait for the Feb. 13 earnings report? If they've sat through the painful slingshot tugging over the past few weeks, the wait is worth it at this point. Bounce back, rubber band. Bo-iinngg.