Baidu: Overbought on Facebook Rumors?

Apr.14.11 | About: Baidu, Inc. (BIDU)

By Sheena Lee

Shares of Baidu (NASDAQ:BIDU), China’s largest search engine, have been pushed higher amid rumors of a possible partnership with Facebook. But according to news reports, there has been no deal signed between the two companies and it continues to be difficult for foreign companies like Facebook to break into the Chinese market. The stock is also starting to look rich, as we pointed out in our February prognosis of Baidu. Baidu opened at $145.62 today, above the 12-month price targets of most analysts tracked by Alacra Pulse.

“A report that Facebook has signed some sort of partnership deal with the Chinese search engine Baidu is inaccurate, according to a source familiar with the matter,” reported the San Francisco Business Times.

Earlier this week, Chinese local media reported that a Baidu-Facebook agreement to set up a social media site in China followed several meetings between the companies’ chief executive officers, citing unidentified Baidu employees.

ThinkEquity stock analyst Aaron Kessler said a Baidu-Facebook partnership collaboration is obviously possible but ”the Chinese government would likely be concerned about information sharing with a U.S. media company. It would really have to be run by a Chinese company like Baidu,” Kessler said. “It would be difficult for Facebook to really have a presence in China.”

Kessler, who has a $140 price target and Strong Buy rating on Baidu, pointed out that there are already Chinese companies offering social networking platforms, notably Sina and Renren, which has filed for an IPO.

A Reuters report also said that according to a source familiar with the matter, although Facebook is evaluating opportunities in China, the company has not signed any deal with the Chinese search giant.

Jefferies & Co. analyst Cynthia Meng initiated coverage on Baidu with a Buy rating and a $200 price target this week. “We like Baidu’s dominance in search marketing, Tencent’s conglomerate of Internet with a hidden jewel real name SNS, and Sina’s leadership in social media, ” wrote Meng, who added the firm enjoys high barriers to entry and sees opportunities in mobile search.

Earlier this month, Mizuho Securities analyst Muzhi Li, who has a $130 price target on the firm, lowered Baidu shares to Neutral from Buy. On the contrary, Jin Yoon of Nomura Securities, who has a Buy on Baidu, raised his price target to $165 from $140 last week.

Within the last month, Goldman Sachs has reierated a Buy rating and raised its target from $130 to $145 and Susquehanna has boosted its target from $145 to $150 while maintaining a Positive rating. But Credit Suisse reiterated its Underperform rating while raising its target from $82.50 to $99.

Leo Sun of Investor Guide said that a rising middle class throughout China will increase Internet usage exponentially, and with 75% of the country’s search market, Baidu could see substantial long-term profits. “However, the rising Chinese RMB can adversely affect Baidu, which reports revenue and costs in RMB while reporting its main financial assets in U.S. Dollars,” noted Sun.

In terms of its fight against Google (NASDAQ:GOOG), although Baidu has so far successfully pushed the U.S. company out of the picture for a while, Google still sits on nearly 20% of the Chinese search market by using its Hong Kong portal, said Sun. “If Google ever re-negotiates its terms with the Chinese government and returns to the mainland, expect Baidu shares to drop significantly. Google is also Baidu’s main threat in the mobile search arena, and has been using its popular Android software as a profitable backdoor to China,” he added.

The Street’s Jim Cramer, who advocates buying Chinese internet stocks, notes the heady valuations of Baidu.

Mark Kreiger on Seeking Alpha is cautious on Baidu, and suggests that investors sell the stock, as he points out that the company’s shares have already gained 11 fold in less than two years. “BIDU has already met its median analyst one year price target of $142 and is only 16% below its most bullish analyst target of $165, while being 33% above its low target price of $95,” wrote Kreiger. “If you put any credence to these analyst target prices, why would anyone bother risking a 33% loss for a potential 16% gain?”

Instead he suggests buying Yahoo! (NASDAQ:YHOO), which he owns, and regards as undervalued.

Sources: Alacra Pulse, San Francisco Business Times, IBTimes, Reuters, Barrons, Seeking Alpha, Investor Guide, StreetInsider, Schaeffers Investment Research, China Analyst.