Why I'm Resisting the Urge to Buy Baidu

Baidu (BIDU) reported Q3 $0.72 vs. $0.63e, R$66.3M v $65.5Me, and guided Q4 Rev $74.7M-$76.7M v $75.7Me (in line with estimates, but not blowing them away -- hence, the after hours drop). (See conference call transcript here.) BIDU subsequently dropped -6.8% from Thursday's open price, to $320.16. Is it worth buying on this dip?

Google (GOOG) shows a nice even trendline of increased earnings from 2005-2007 while P/E decreases.

BIDU (IPO 2005) earns $1.68 EPS, compared to GOOG's (IPO 2004) $12.78 EPS.

Given these earnings, let's look at their historical price to earnings ratio:

Baidu shows a much slower earnings progression and a jumpy chart. Its P/E is high, and even increasing as EPS flattens.

GOOG IPOed at 125 P/E, while BIDU IPOed at 450. BIDU's P/E is still very high given its EPS. In other words, there is MUCH expectation built into BIDU (about 4-6x the expectation of GOOG). BIDU has to produce strong earnings to justify its current price. BIDU's forward guidance is a tell tale that it may not be up to the task. I may be wrong, but at this level I am resisting the urge to buy on the dip.

That said, being a Chinese internet stock, it would not surprise me if BIDU shot to 400 tomorrow.

Comments

[Sr. Pessimist:]

Currently there are perhaps roughly 300 million in the Chinese workforce, with perhaps 500 million in the rural areas who are awaiting introduction. In the American workforce, we see perhaps a rough 100 million. The Chinese workforce is around 3 times the size, and may ultimately grow to be as much as 8 times the size, of the American one.

The born-rich non-workers don't make productive use of a search engine, because they are non-performers for an economy (they do not contribute despite their consumption). In other words, the only valuable money is that held by the proletariat. I'm trying to imagine the IPO of Baidu as a guess that the Chinese economy will grow to be 4 or 6 times the size of the American economy. That makes sense, because any nation with a nuclear arsenal can steal Arab oil. Anybody with an Internet connection can outsource labor. This is quickly becoming unprofitable. So when it all equalizes out, the only thing that matters is the domestic work force.

China having 4 to 6 times the economic value of the US sounds about right to me, assuming Google was a good investment for a given investment plan. Further, China is less illegitimate than the US. As much as people like to say the government owns everything, it's less so than in the US, because in China you as a business can't survive just by connection. So if Baidu is comparable to Google in terms of functionality, long-term I can see Baidu with comparable prospects. And I agree with the author about the investment quality. Maybe a good investment, but might want to hold off right now.

2007 Oct 29 04:13 PM