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Goldman Sachs Internet analyst Anthony Noto initiated coverage of Baidu (ticker: BIDU) last week with an underperform rating. Extracts his note to clients (courtesy of Barron's -- subscription required):

We remain extremely positive on the market opportunity in China and Baidu's commanding leadership position in Web searching.

We attribute Baidu's success to its comparative advantages driving the search productivity cycle, including a leading search brand, distribution network and advertiser base, among others.

The company has a strong financial profile with approximately 35% revenue and about 40% earnings-per-share growth from 2006-2009 (71% revenue growth and 106% earnings-per-share growth in 2006).

Despite these positives, valuation remains the one downside to the story as we are not able to justify current valuation even when evaluating more aggressive scenarios.

Our implied value for the stock is approximately $27, which is well below the current price of $112. Our most aggressive scenario yields an implied value of about $45, still 60% below current levels.

BIDU chart.

Source: Goldman on Baidu (BIDU)