Tactical Trading: Why Buy Baidu?

| About: Baidu, Inc. (BIDU)

By Kevin Cook

Two weeks ago, I recommended looking for buying opportunities in Baidu (BIDU) after the stock had found support at $100. Ahead of its earnings, reported yesterday, I said be prepared to buy it on the breakout above $135, or on any dip back toward $110.

Even if you bought the first breakout above the 50 and 200-day moving averages at $135 and suffered the pullback to $120 last week, you still did very well as the stock surges above $140 today on the back of its strong Q3 report, hitting a high of $147.68.

Why Buy Baidu?

One year ago this week, I made the techno-fundamental case for buying the stock around $110. As Google (GOOG) exited China, Baidu would only clean up. Writing for TheStreet.com, here was my rationale...

"Apparently, institutional growth and technology investors love the BIDU story. And though the earnings are modest now, they are growing rapidly. 2011 estimates could see $2.50, which would bring this $100 stock down to a more comfortable 40x multiple. But it seems the real appeal of BIDU might be in futures earnings not even visible yet.

As the dominant Chinese search engine and web portal, investors see the potential for BIDU to capitalize on the largest fast-growing middle class population in the world. I have written often in the past year about the Chinese emerging markets story fueling the growth of American industrial companies like Caterpillar (CAT) and Eaton (ETN).

But I haven't paid much attention to the consumer side of China's ascendancy. Obviously, young, educated, and ambitious Chinese citizens will use the web more and more to learn, acquire, and do business. And however American consumer companies gain access to Chinese markets, they may end up adding profits to BIDU's business model too, whether partnering, paying an information or transaction toll of some kind, or merely through advertising."

Keep Buying Dips in Baidu

What's changed since I wrote that one year ago? Nada. Well, except that they are on pace to earn nearly $2.90 this year. And beating the 3rd quarter estimates yesterday by a penny helped the cause.

But what was more impressive was the sales growth. Here's the story from Pete Barlas, writing for Investor's Business Daily today...

Revenue jumped 94% to $654.7 million. Analysts had expected $619.3 million. Part of the big gain, though, was from Baidu including for the first time results from its travel search unit, Qunar. Baidu didn't say how much that added to its top line.

For the current quarter, Baidu said it expects revenue of $691.4 million to $711 million. The midpoint, $701.2 million, would be up 89% from Q4 2010. Analysts had forecast $649.4 million.

This kind of growth will probably lead to rising EPS estimates, keeping the forward P/E below 50. I am not as optimistic as most analysts with price targets near $200. But I think we can see $175 in the next three months and I will buy the dips with call options.

See Baidu Free Stock Analysis Report

Disclosure: No positions at this time.