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Baidu (NASDAQ:BIDU) rallied almost 7% to around $76 this morning after a 10-for-1 stock split in the US market made shares in the the hot China search engine company more attractive to smaller investors. Following Google’s (NASDAQ:GOOG) retreat from China, investors had already been flocking to buy shares in Baidu in recent month. The company’s price tripled in the last year, and it recently announced that its quarterly earnings had more than doubled from a year ago.

So why did Credit Suisse analyst Wallace Cheung downgrade Baidu to “underperform” from “neutral” with a price target of $519? TechTraderDaily reports it’s because of the company’s expensive valuation, and on top of that, the firm could lose advertising dollars in the second half of this year due to higher pricing. Expenses could also go up as the company adds 1000 employees this year, noted Cheung. (Note: price targets in this post were made before Baidu’s 10-for-1 split.)

The Street’s Jake Lynch agrees, saying investors should think twice before jumping on the Baidu bandwagon: “Even assuming that Baidu can increase earnings at a generous rate of 55% annually, its stock is overpriced, trading at a 67% premium to fair value and a 99% premium to the industry average…The slightest hint of a cap on expansion will cause so-called growth investors to dump its stock. That risk lingers on the horizon, yet investors are currently pricing Baidu as though the company will enlarge ad infinitum.”

However, even at current prices most analysts are keeping Baidu on their “buy” list. In an April 29 report, Susquehanna Financial analyst C. Ming Zhaoeven upped the company’s price target to $1000 from $728, citing “explosive growth” in the second quarter. Zhao believes that the company will see an increase in profit margins due to “accelerating monetization.”

“It’s not going to happen overnight, but over time Google’s traffic will decline gradually and over time we expect one-third of the advertising dollar to shift to Baidu,” Elinor Leung, a CLSA analyst in Hong Kong told Reuters, citing a 2-3 year period. Baidu captured more than 64 percent of China’s search market in the first quarter, up from 58.4 in the fourth quarter, while Google’s share fell to 31 percent from 35.6 percent, according to research firm Analysys International.

Sell-side analysts remain overwhelmingly bullish on Baidu, with 17, or 71%, rating its shares “buy”, six rating them “hold” and one ranking them “sell.” RBC has a price target of $954, while JPMorgan predicts the stock will climb to $850, according to data from TheStreet.

Brean Murray analysts initiated coverage of the company at “buy” following the firm’s recent blow-out first quarter earnings, and the median price target by analysts is now at $780, based on data from Thomson/First Call.

Baidu’s rapid earnings increase in the past few years has been caused by a rising internet penetration rate in China, and it has also managed to keep foreign competitors from taking away market share. But as the internet penetration rate slows and China’s torrid economic growth cools down, analysts will be closely monitoring whether Baidu will be able to justify its heady valuations.

Sheena Lee

This post was based on a Company Search of Alacra Pulse for Baidu.

Source: Pulse Check: Can Baidu Sustain Its Expensive Valuation?