Worries for Baidu

 | Feb 14, 2012 | 8:00 AM EST
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Baidu (BIDU) will report earnings on Thursday.  There is a lot of excitement among Baidu bulls waiting for the results.

On the surface, it appears to have the makings for another blow-out quarter, which should propel the stock above $140 a share and close to its all-time high of $165.

Baidu continues to dominate in China search. Google (GOOG) has hinted at a possible return to the mainland, but there's no question that its departure two years ago ceded huge market share to Baidu, which will be tough to win back.

Baidu also has the advantage of more clearly showing its advertisers the ROI of its yuan spent on various campaigns. This is very powerful when compared to display ads that have been evident in the more recent quarters of Baidu and Google relative to traditional Web portal companies.

But there are reasons to be concerned about Baidu. I'm not short the shares, but I don't own them either here.

  1. Sohu (SOHU) laid an egg last week. The stock tumbled to $54 from $63 on its earnings. It's now trading down to $51. The main reason for the disappointment was the lightening up of ad revenue spending for the Chinese portal. The last 18-24 months have been a feeding frenzy for Chinese Web companies spending like drunken sailors. Companies like Baidu, Sina (SINA), Sohu and others couldn't take in the money fast enough. Sohu's results, the first of all the other Chinese portals for this earnings period, were perhaps the first canary in the coalmine that something's shifted over there. It's clear that some of the smaller and private firms have had to cut back their spending. Despite the excitement of Facebook's IPO, other more relevant comparisons for these companies, like RenRen (RENN), have had major busted IPOs. Underwriters are showing much less enthusiasm in taking these firms public and these firms' backers are hitting the brakes big time. It might still be too soon an effect in this quarter's Baidu's numbers. Recall that it took and extra quarter or two for the results to show up in Google's numbers relative to Yahoo! (YHOO) or AOL (AOL). But it does seem destined to be heading Baidu's way.
  2. New Baidu competitors continue to perk up in China. One of the little-focused-on aspects of the Sohu report was that their search division saw its traffic rise more than 200%. This is still very small, but there's no question that competitors continue to eye the pool that Baidu is dominating as ripe for more competition. It seems to be a foregone conclusion that Google will return to the mainland. What's more, Jack Ma has made it clear that he also wants to enter the Chinese search market as he thinks his Alibaba Group can deliver a better product to advertisers and consumers than what they're getting from Baidu. These competitors' assaults on Baidu will take time for sure, but the stock market has a way of pricing in what it thinks is inevitable. If there are signs of weakness in Baidu's numbers, the stock could be punished, anticipating further competition to come.
  3. The stock looks a little stretched here. Even though it is still below its 52-week high, it is up to $138 from $114 in mid-December.

These are all good reasons to avoid Baidu going into earnings.


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