How Goldman Sachs Has Fared on Baidu Coverage

Baidu (NASDAQ:BIDU) shares surged after being upgraded by Goldman Sachs on December 16. The market's initial reaction was not surprising given Goldman's brand name, but it is still prudent to check the track record of Goldman's calls on BIDU, as summarized below. We assigned "Good" or "Bad" to each call, and calculated an overall "shooting percentage" at the end.

Sep 14, 2005: Goldman initiatied coverage with an Underperform (Sell) rating. Analysts believed BIDU's price ($113.59) was significantly higher than its estimated fair value of $27. BIDU dropped 29% to $81.05 by Oct 26, 2005, when the next major call was made. GOOD CALL.

Oct 26, 2005: Commenting on 3Q05 results, analysts saw 30%+ downside - they still believed BIDU's valuation was unjustifiable, even after applying aggressive assumptions. BIDU dropped 36% to $51.69 by Feb 21, 2006. GOOD CALL.

Feb 22, 2006: Commenting on 4Q05 results, analysts saw 20% downside to after-market level - they still believed BIDU's valuation was stretched even after applying aggressive assumptions. BIDU rose 19% to $61.38 by May 9, 2006. BAD CALL.

May 9, 2006: Commenting on 1Q06 results, analysts believed BIDU traded 10% above fair value, and its P/E multiple was at a 75% premium to Chinese Internet peers and 10% premium to Google (GOOG). BIDU rose 50% to $91.97 by Jul 26, 2006. BAD CALL.

Jul 27, 2006: Commenting on 2Q06 results, analysts believed results were negative for BIDU because its revenue did not outperform market expectation. They saw additional pressure from the 16 million lock-up shares that were pending. BIDU dropped 5% to $87.28 by Oct 31, 2006. GOOD CALL.

Nov 1, 2006: Commenting on 3Q06 results, analysts upgraded BIDU to Neutral from Sell. They would not be a buyer of the stock because execution risks were expected to last several quarters. BIDU rose 34% to $117 by Dec 15, 2006. BAD CALL.

Dec 18, 2006: Analysts raised target price to $128 from $93 based on more optimistic outlook for margins. They increased long-term growth estimate from 25% to 30% and believed competitive pressures were less than previously estimated. BIDU dropped 2% to $114.51 by Feb 14, 2007. BAD CALL.

Feb 15, 2007: Commenting on 4Q06 results, analysts maintained Neutral rating and $128 price target. They became more concerned with outlook of Chinese paid search industry, due to BIDU's efforts to diversify from paid search to brand ad and from China to Japan. BIDU dropped 8% to $105.78 by Apr 26, 2007. GOOD CALL.

Apr 27, 2007: Commenting on 1Q07 results, analysts slighly increased future estimates, and raised target price from $128 to $134, but noted BIDU was fairly valued at after-market level (around $134). BIDU rose 66% to $175.74 by Jul 24, 2007. BAD CALL.

Jul 25, 2007: Commenting on 2Q07 results, analysts noted BIDU missed profit margin expectations for the first time. They raised target price from $135 to $185. They thought BIDU might dropped from after-market level of $218. BIDU rose 95% to $341.99 by Oct 25, 2007. BAD CALL.

Oct 26, 2007: Commenting on 3Q07 results, analysts increased target price from $185 to $310, and significantly increased revenue and EPS estimates for 2007 and 2008. BIDU dropped 24% to $261.09 by Feb 13, 2008. BAD CALL.

Feb 14, 2008: Commenting on 4Q07 results, analysts decreased revenue and profit forecasts because of unfavorable trends in guidance and profit margins. They reduced target price from $310 to $280. BIDU rose 34% to $349.66 by Apr 23, 2008. BAD CALL.

Apr 24, 2008: Commenting on 1Q08 results, analysts increased revenue forecast by 6% and profit forecast by 4%, and target price from $280 to $310. BIDU dropped 17% to $288.70 by Jul 23, 2008. BAD CALL.

Jul 24, 2008: Commenting on 2Q08 results, analysts kept their revenue projections for 2008, 2009, and 2010, but increased EPS estimates signifcantly for these three years. They raised target price from $310 to $350. BIDU dropped 14% to $249.09 by Oct 22, 2008. BAD CALL.

Oct 23, 2008: Commenting on 3Q08 results, analysts slightly decreased revenue estimates while increasing forecasts on operating income. They noted that for Baidu, growing revenue was more important than controlling costs. BIDU dropped 53% to $118.09 by Dec 15, 2008. GOOD CALL.

Dec 16, 2008: Goldman rated BIDU as a "Buy" for the first time in its history of covering the stock. Analysts believed BIDU's P/E ratio was reasonable compared with its growth potential and peer stocks' P/E multiples. The stock surged on the upgrade. We will have to wait for some time before deciding whether it was a good call.

In conclusion, Goldman made 5 good calls on BIDU, out of the total 15, before they upgraded BIDU to Buy. The "shooting percentage" was 33%.

Disclosure: We don't have a position in BIDU. The judgment on each call was our own opinion.