Baidu May Test August Lows

Shares of Baidu (BIDU), the Chinese search juggernaut, lost over 18% of their value during the last week and have declined more than 50% since reaching a high of $418.22 on December 28^th. The share slump can be traced to the overall selloff in foreign equities, a general investor shift from momentum stocks to value stocks and commodities, recent inflation and social concerns in China, and short selling.

With a trailing p/e of nearly 83, the shares are still expensive and trade at a significant premium to other China based web companies like Sohu (SOHU) and Sina (SINA), with trailing p/e ratios of 57 and 34, respectively. At current levels, Baidu shares trade at more than 2.5 times the 32 trailing p/e of Google (GOOG); however the premium can be justified by the company's 2007 revenue and net income growth rate of 108% and 79% versus just 51% and 17% for Google.

Baidu is the search leader in China, with share estimates north of 70% in what is now the world's largest internet market. Future growth prospects for the company are bright and will get a turbo boost this year from the Summer Olympics.

In spite of the rosy future, near term trends indicate Baidu shares are likely to remain anchored in the $200 to $225 range and could breach the $200 level with another market sell off. If the $200 support level is taken out, short sellers could quickly drive the shares down to near the August 16^th low of $161. The latest data indicates that nearly 12% of the company's share float is sold short and the recent share performance indicates the short sellers are now in the driver's seat.

Should a sub $165 price level be reached prior to the company's Q1 earnings release, it will represent a good buying opportunity as at this level, shares will trade at a more palatable trailing p/e of 60 (based on the reduction in share price combined with the anticipated Q1 earnings). From these levels, I anticipate the shares will climb back to the $240 to $250 range prior to the start of the Summer Olympics, representing a healthy 50% move for an opportunistic investor.

Disclosure: No position in Baidu.

Comments

[mikemichaelson:]

ain't happening my friend. who can trust a guy with a name like dave davidson anyway?

2008 Mar 24 09:52 AM

[Nose Dalton:]

Bad logic on your part. A great CFO has been hired that you failed to be aware of. This is why the stock initially dropped after the first of the year.
PAY ATTENTION! THAT'S YOUR JIB!!!

2008 Mar 24 10:31 AM

[BillW:]

What are you smoking??? During the worse months in Jan and Feb, the stock had basic support at $245. We are going to be trading as usual between $240 and $260. Last weeks drop was due to mm manipulation for options expiration. We will see $300+++ by Olympics. Dont forget all the money on the sidelines... I dont see any near term trends taking this to $160. BTW, Forward PE of 37 is extremely reasonable for this Hyper Growth Stock.

2008 Mar 24 05:09 PM

[aletheia:]

You fail to mention that in the last few weeks, Baidu is being seriously sued by the official government endorsed Music Copyright Society of China amongst other labels and distributors. And Chinese publications are reporting that some of Baidu’s dubious practises are coming to light with regards to their music search.
www.chinadaily.com.cn/...
and Forbes also had an article here:
www.forbes.com/markets...
These are serious questions being asked about how Baidu's music search actually operates and whether it crosses the line as some have suggested that there is the possibility that Baidu could be hosting the music files illegally themselves. If this is the case, then we could very well see a case of fraud emerging. Already, another listed company Focus Media was censured heavily by the authorities because 7 of its subsidiary companies were involved in institutionalized mass mobile spam.

2008 Mar 26 12:17 AM

[Big Mouse:]

I thought about peer P/E comparison, but have never used it.
If a cross-sectional comparison works,
how can the company's P/E maintain high for such a long time.
Note that, Baidu is a monopolist, while Sina and Sohu are merely market leaders.
So Baidu should have a P/E premium over those news portals, if comparable.
Now I use P/E band, time series might be more reasonable.

2008 Mar 26 11:38 AM