towards the end of July. To no surprise, the stock flew nearly $30 to $210 per share.However, shares of the Chinese search leader haven't been able to hold their ground due to a very weak overall stock market. Consequently, the stock has fallen back to about $190 per share. In my opinion, this pullback has opened the door to an interesting trading opportunity.
For the quarter, the company reported very solid numbers. Revenues easily beat street estimates of $48.4 million by coming in at nearly $53 million. Earnings per share came in at 54 cents vs. Street estimates of 44 cents per share. Active customers grew 42% year over year and 14% since last quarter. All in all, the company performed significantly better than expected and continues to grow incredibly well.
Analysts all seem to agree that the growth in Baidu isn't done. The internet and paid search markets both remain very young. Credit card penetration and advertising are both expanding and gaining momentum throughout the company. As credit card penetration increases, the eCommerce market stands to begin developing throughout China -- a market that has become a very large user of paid search platforms in the United States. According to the company's management, it only reaches 1% of the addressable market at present -- clearly indicating the potential for continued or even accelerating growth.
Over the short term there are several potential catalysts. The company's instant messaging service, which was recently delayed at the last minute, could launch within the next quarter or two. Simply from judging my dependence on instant messaging, if this product takes off in China it could quickly become a top-line contributor to the company.
In addition, I think there's a very good chance that the company will beat estimates when it reports third quarter earnings. The company has consistently provided revenue guidance that it has managed to outperform. This quarter's revenue guidance of roughly $65 million came in well-above prior Street expectations for $59 million. However, even at present, the consensus estimate sits at $64.45 million, below the low-end of the company's revenue guidance ($64.6 million).
There's also a longer-term catalyst: success in the company's Japan project. Although Baidu continues to pour money into this business (7 cents per share last quarter) and will probably continue losing money on the business into next year, the search engine is expected to launch later this year. Generally speaking, analysts haven't been valuing this business into their price targets. Therefore, any indications that this product is becoming popular or gaining market share in Japan should help Baidu shares as analysts are forced to begin modeling Baidu Japan into their estimates of the company's value.
Now we get to the hard part: valuing this company. To be honest, I'm not sure what this company is worth and I think the price of the shares is much more dependent on sentiment and news flow than intrinsic value. But I've read analyst reports that suggest valuations in the $250 per share range (Citigroup). The value investor in me reads their rationalizations of this target and giggles, but the trader in me says anything is possible.
Whatever the case may be, I'm a believer in the Baidu story and at nearly 15% off its recent highs, I think now could be the time to get involved.
Over the short term there are several potential catalysts. The company's instant messaging service, which was recently delayed at the last minute, could launch within the next quarter or two. Simply from judging my dependence on instant messaging, if this product takes off in China it could quickly become a top-line contributor to the company.
In addition, I think there's a very good chance that the company will beat estimates when it reports third quarter earnings. The company has consistently provided revenue guidance that it has managed to outperform. This quarter's revenue guidance of roughly $65 million came in well-above prior Street expectations for $59 million. However, even at present, the consensus estimate sits at $64.45 million, below the low-end of the company's revenue guidance ($64.6 million).
There's also a longer-term catalyst: success in the company's Japan project. Although Baidu continues to pour money into this business (7 cents per share last quarter) and will probably continue losing money on the business into next year, the search engine is expected to launch later this year. Generally speaking, analysts haven't been valuing this business into their price targets. Therefore, any indications that this product is becoming popular or gaining market share in Japan should help Baidu shares as analysts are forced to begin modeling Baidu Japan into their estimates of the company's value.
Now we get to the hard part: valuing this company. To be honest, I'm not sure what this company is worth and I think the price of the shares is much more dependent on sentiment and news flow than intrinsic value. But I've read analyst reports that suggest valuations in the $250 per share range (Citigroup). The value investor in me reads their rationalizations of this target and giggles, but the trader in me says anything is possible.
Whatever the case may be, I'm a believer in the Baidu story and at nearly 15% off its recent highs, I think now could be the time to get involved.
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Reader Comments (Page 1 of 1)
8-14-2007 @ 2:35PM
Michael Schneider said...
At its IPO almost everyone viewed the valuation as too high. There were concerns about competition with Yahoo and other factors. Bidu has done really well and like many great stocks it is tough to find a good entry point. In this market, everything is risky and a stock like Bidu could fall quite a bit if emerging markets get hit hard in a continuing faltering market. Still, it is hard to resist and it is reasonable to expect that some of the Chinese stocks might be long term bargains. A recent item on Chinese stocks that should benefit for China's Olympics next year is available at http://www.Barreloworld.com. I would add Bidu to the list. However, I am not ready to dive in when the market is this unsettled. It's a time to monitor stocks and look for bargains. I'm not sure it is time to act unless you can absorb losses.
8-15-2007 @ 11:41AM
ajoyk said...
Citi has good grounds for its target of $250. Baidu
has over 60% of the market, and its market share
has been consistently rising for the last 3/4 years.
Citi has taken South Korea as a comparison market to
determine where Baidu would be in 5 years. South
Korea's Naver NHN has roughly the same market
share as Baidu, and China's first-tier cities (with
roughly the same population as S.Korea) are expected
to have around S.Korea's GDP in 5 years. Most
analysts, including those negative on the stock, still
think it will continue to dominate China's search
market. Piper Jaffray, SIG, Susquehanna, S&P500,
and CIBC are all positive on the stock and have
targets ranging from $230 to almost $300.
Analysts negative on the stock (Morgan Stanley,
CSFB and Goldman Sachs) mostly think stocks
should not be valued on projections as far out as
5 years into the future. Typically, traders tend to
take more risks than analysts do, and so this stock
will continue to rise, barring a dramatic shift in
market share.
8-17-2007 @ 11:47PM
Gregg said...
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