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Saturday 23 October 2010

Baidu as the Google of China

Baidu: China's Google can't be beat

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 Shares of Baidu have trounced Google's this year as the Chinese search engine's sales and profits soar. By Paul R. La Monica, editor at large

NEW YORK (CNNMoney.com) -- Some investors refer to Baidu as the Google of China.
But if Baidu keeps delivering quarterly performances like its most recent one, investors may have to start calling Google the Baidu of the United States.
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Baidu reported third-quarter profits Thursday night that more than doubled, easily beating analysts' forecasts. Sales rose a stunning 76%. The company continues to gain market share in China while Google (GOOG, Fortune 500) remains a distant second -- especially after Google essentially threw in the towel on keeping a presence in mainland China.

Shares of Baidu (BIDU) shot up nearly 6% Friday morning on the news, hitting a new record-high in the process. Can the stock possibly still be a buy at this point?

It's getting tougher to blindly ignore the stock's exorbitant valuation. But amazingly, several analysts think Baidu has nowhere to go but up.

"All fundamental drivers for growth of online and search advertising in China remain unchanged, and Baidu remains the prime beneficiary," wrote RBC analyst Stephen Ju in a report Friday morning.

Aaron Kessler, an analyst with ThinkEquity Partners, added in a note Friday that Baidu had made great strides toward improving how much revenue it generates per click thanks to its Phoenix Nest program, which is kind of like Google's AdWords sponsored links service.

Baidu also has room to grow in another key area of online media -- contextual ads. Contextual advertising, displaying relevant ads over a network of sites (i.e. services like Google's AdSense), is something that Baidu is developing.
"Due to its superior technologies, Google remains as the biggest player in contextual ads in China, but the gap between Google and Baidu in market share is not huge," wrote C. Ming Zhao, an analyst with Susquehanna Financial.

Baidu, like Google, is also continuing to invest aggressively in research and development, in order to make sure that it holds onto its search lead and can catch up to Google in other areas.

Oppenheimer analyst Paul Keung noted in a report Friday that the company is dipping its toe in businesses that could eventually become big generators of revenues and profits, such as online video, mobile search and Baidu's so-called "box computing" initiative, which is Baidu's take on the apps craze.

"While there is no large [revenue] contribution in the near term, we believe even with fierce/crowded competition amongst the sectors [Baidu] still serves up as an advantageous newcomer," he wrote.

Still, it's worth wondering if this is all more than priced into the stock already. Baidu trades at nearly 50 times 2011 earnings estimates, an incredibly rich multiple for a stock.

In order to make the case that Baidu is still a bargain, you have to factor in just how rapidly it's expected to grow. Kessler said in his report that the stock's current valuation is justified because he expects Baidu's profits to grow at a rate of 40% a year, on average, for the next few years.

In fact, he increased his price target on Baidu Friday to $135 a share, 25% higher than where it's trading at now.

Sure, Baidu isn't for the faint of heart. But it's undeniably a leader in one of the hottest segments of one of the world's hottest markets. Stocks like that often aren't on sale -- and for good reason.

Reader comment of the week. And my mind is on the brink. I wrote on Monday about how big bank stocks may face another problem with the foreclosure fiasco. That sparked one reader to endorse even tougher rules on the big banks.

"The banking industry needs to be changed to not make crazy profits. They provide a service that mom and pop shops can not. Every dollar they make comes out of a small business or large corporation's ability to hire more workers. Watch out for banks coming after you for every fee imaginable," wrote Mike Lenzini.

Over in the Twitter-sphere, I issued another of my crazy pop culture challenges Thursday. I noticed that shares of tobacco giant Philip Morris were down after reporting results. That got me humming a tune with the following lyric that I asked you to identify: "And curse Sir Walter Raleigh. He was such a stupid git!"

Many followers responded with the correct answer. "I'm So Tired" by The Beatles. But the first to do so was Sabin Woods (@clannwoods). Congrats! I'd give you everything I've got for a little peace of mind.

- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney.com, and Abbott Laboratories, La Monica does not own positions in any individual stocks.  To top of page 
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