It's Too Soon to Bid Baidu Adieu

 | Feb 15, 2012 | 10:30 AM EST  | Comments
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Chinese Internet giant Baidu (BIDU) is expected to report fourth-quarter results after the bell Thursday. The consensus estimate is for revenue of $700.8 million and net income of $0.91 per share, an increase of 82% from a year earlier. With a slowing Chinese economy and seasonal weakness, can Baidu continue its spectacular growth streak, or is it time to bid adieu to Baidu?

According to Alexa.com, Baidu is the most frequently used search engine in China and the sixth-most-trafficked website in the world. The company holds a commanding lead in Chinese search.

Chinese Internet companies have been haunted by accusations of accounting irregularities and a lack of appropriate oversight in their sales practices. This has led to volatility in the group. But Wall Street has brushed aside those concerns and projects that Baidu's revenue will rise 83% in fiscal 2011 and 50% in 2012. Earnings-per-share growth is expected to average 60% over the next three years. Unconfirmed reports last September had a senior Chinese official indicating China had more than 500 million Internet users. The story soothed investors' nerves and helped send BIDU shares higher.

Last quarter, Baidu reported very strong results. Average revenue per user (ARPU) grew 19.8% quarter over quarter. Revenue rose 85%. The company gave stronger-than-expected fourth-quarter guidance. I believe that Baidu can report $4.50 in operating earnings for the full year 2012. Although there are estimates as high as $5.01 ($3.8 billion in revenue), I believe that anything above $4.65 ($3.5 to $3.6 billion) would be a stretch.

Baidu shares seem trapped in a broad range between $120 and $140, which probably reflects investor concerns over the health of China's economy. If the company is able to produce a blowout fourth quarter, let's say EPS above $1, the stock should continue its trajectory toward $160. Otherwise, the stock trades back down to $120 as momentum investors freak out.

Baidu is a great way to play the emerging Chinese search business. While some analysts are concerned about the lack of a mobile search strategy, weakening margins, and slowing revenue growth, I see Baidu as an interesting speculative stock. Since the stock has rallied lately, I would wait until after the earnings report. It seems as though many investors bought shares ahead of the report and could sell going into it. It's too early to bid adieu to Baidu.

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