Baidu: A Train Heading for Derailment?

Baidu's (BIDU) valuation is reminiscent of the era circa 2000, just before the dotcom bubble popped. Do you recall analyst Henry Blodget’s (of Merrill Lynch fame) bold Yahoo (YHOO) price target of $425 when YHOO shares were near the $300 mark? It turned out to be a disastrous call, as YHOO’s share price subsequently plummeted by more than 95% to the $10 area.

Citi recently raised its opinion on BIDU from a hold to a buy and increased its one year price target from $350 to $415. What good is it to get an upgrade after the shares have almost doubled in the last month from the low $200s? Baidu's shares have risen too far in too short of a time and, as a result, are severely overbought and due for a subsequent correction. Citi’s upgrade is too late; they should have issued the upgrade before the big move. I’d be leery of analysts' recommendations, as I expect that they sometimes have a “hidden agenda” in effect. Over the past year, analysts have been raging bulls on Baidu, with seven out of their last ten actions positive; Canaccord Adams was the lone bear with a sell rating in place.

At a market cap of nearly $13 billion, this stock is worth more than most of the U.S. air carriers combined, as Jet Blue (JBLU), United, Delta (DAL), Northwest (NW) and AMR’s (AMR) market cap shared is less than $12 billion, yet these airlines are estimated to generate 09 revenues of $86 billion, equating to more than 118 times BIDU’s expected revenues of $731 million. The shares are rich beyond even wildest dreams, selling at 91 times 08 estimates of $4.08 and 57 times 09 estimates of $6.54 (assuming 60% eps growth). Google (GOOG) is selling at only 23 times 09 earnings estimates. Now, I’m fully aware that the airlines aren’t generating a lot of earnings these days, and that BIDU is in a tremendous growth sector within an emerging market, however, I expect GOOG and YHOO to quickly start chipping away at BIDU’s market share as BIDU starts to deal with the law of larger numbers.

The shares present ample risk, as anything could happen, such as the Chinese government imposing undesirable regulations on BIDU or new technology emerging that render BIDU’s search technology less desirable. Since BIDU is a foreign company, they don’t have the same regulations as U.S. companies and, as a result, aren’t required to file 10Qs or 10Ks with the SEC. In addition to less stringent accounting standards, company insiders aren’t required to file a notice when they sell their shares, further clouding transparency. The shares are also trading at 40 times shareholders' equity, quite rich by most standards.

Traffic acquisition costs (commissions paid) for first quarter of this year versus the same quarter last year increased 30%, from 10.3% to 13.3% of sales. That’s a significant rise, as it could pressure margins in the future. Its online marketing customers rose a paltry 3.9% on a sequential basis, which is less than stellar for a high flying growth company.

Other red flags that pop up are a large short interest position of 5 million shares, or 15% of BIDU’s 35 million shares outstanding, which is ten times GOOG’s short percentage of only 1.5%. There must be a reason why this equity attracts so many bears.

Conventional wisdom clearly pushes the theory that “the trend is your friend”, and riding the momentum train is prudent, however this train could be heading for a certain derailment around the bend since the shares at these “lofty levels” appear to offer more risk than reward.

Disclosure: Author holds a short position in BIDU

Comments

[do no evil]

a short seller becomes an unethical journalist when he tries to move the market for his own gain

[faststock123]

You have far too short vision on this stock....China is the fastest growing internet market in the world...it is just at the beginning of very fast growth...I think Bidu could grow 100% or more for the next 3-5 years....at 57 X 09 earnings the company is a bargain. Grab a bit more LT vision and you will be happy. Those shorting this stock will be very dsiappointed! The stock will be very volatile...up and down 25% quickly....but LT Bidu is a winner. It could start a 25% correction now since it just ran up 75% from March bottom. Let's watch - over LT you want to be long this company! R.L.

[Walt17]

I basically agree with your view on Bidu. But also think shorting it involves a big risk. It could easily rise another 200 before falling. I do't have the nerve to watch that.

do no evil
Is someone who is long a stock unethical when they write a positive article?

[Procrastinator]

Do No Evil, you're a fool. Do you really think the author believes he's going to "move the market" in this international stock with this single article??

[Genecis]

Since the author has disclosed his position, his ethics as a journalist are impeccable, in this instance, IMHO.

[WebWatcher]

To write an article like this, some knowledge of the internet sector is required, at least some due diligence should be performed. The author clearly doesn't have much a clue.

This is not to say that I am long or short on this stock, only to remark on the lack of thought discipline on this. First, the competition in China from Google / Yahoo to Baidu has resulted in Baidu gaining close to 70% of search market, up from about 50% two years ago, when everyone expected Google was going to kill Baidu. Secondly, the market growth is nothing comparable to that of Airliners, both from an overall market perspective and from a Web Monetization perspective. Third, Baidu is not as simple a search engine than a widespread ranges of Web services, and as far as government is concerned, they have done an excellent job, 10 times better than Google.

The stock is not cheap, I don't bet either on it. But this kind of article is very misleading.

[Ajoy]

No, they are required to file 10Ks, and insider trading that
crosses the 5% ownership mark. A low sequential increase
in the number of customers isn't significant because Q1 is
cyclically a slow quarter, on par with the previous Q4.
TAC increase is the only negative in their report.

[Alpha Seeker]

The biggest growth story in China and the biggest growth country in the world. Baidu is the leader in this space and clearly going towards $500/ share and a valuation number close to Google's :)
WallastonInvestments.com

[User 188258]

The fact that you would compare value as a multiple of revenue in a completely different industry, renders anything else you had to say, irrelevant. A 50 PE is like putting your money in the bank at 2%. This company is the dominant player in its industry in and enormous market that is in its infancy. Why don't you just keep your money in the bank.

[AndyMan]

As peak oil approaches....oil prices/fuel prices will rise...rise....rise..most airline companies will go bankrupt as we are seeing. As prices rise all around the world...people will have to focus a larger portion of their income on energy/food/basic needs. I would suspect air travel to drastically decrease from the retail sector as time goes on. As technology progresses...businesses will also travel less as teleconferencing will be preferred from a cost and time basis.

A companies fair value is both present value and forward looking.....I would see airlines as horrible investments as I think they will all go bankrupt with time if they continue to use jet fuel....and there isn't many alternatives right now. Biofuel with a 60-70% energy density of jet fuel most likely can't be used (maybe?). This is all coming from someone within the aerospace industry.

More and more people will spend time online....as they can't afford to drive around when fuel prices are $8-10-12/gallon in the near future. Baidu is a market leader......Google hasn't been able to take market share from them.....and Baidu plays on an uneven playing field....not held to US regulations....which I see as a HUGE advantage.

The shares are overpriced some....but nothing hugely out of the ordinary for the growth they are experiencing and will experience.

Just MO.

[RW]

I think BIDU is due for a small pull back and the author is trying to emphasis the pull back to advantage. I have a May straddle on it and I think it is time to sale the call and hope he is sucessful in making the pull back large enough for me to break even on the put. After that I think it will follow GOOG.

[weng ho teng]

This article fails to take into account the fact that the Chinese government wants Baidu to be the dominant player in China.

Thats why China controlled China netcom and Baidu juts joined forces.

Smaller Chinese compnaies like MYST.OB have also being given an enormous lift by their partnership with China Netcom

[globalmacro]

This article is dumb, dumb, dumb. Comparing Baidu to US airlines is a laughable exercise. Every Chinese stock has a huge short interest -- call it the bandwagon effect. The fact that a Chinese stock has a large short interest is completely meaningless except for the fact that it should provide for an extra pop when sentiment shifts. In 2000, companies with earnings were trading at a PE of 2,000 and most of the .com's weren't even profitable. Baidu is profitable and growing very fast. Your comparisons are elementary and flat out incorrect. Many of the Chinese stocks listed on the NYSE are some of the most attractively valued securities that can be found anywhere in the world currently.

[User 142738]

Actually, I find the comparison of Baidu to the U.S. airlines to be incredibly fair: they’re both supported by, funded by, invested in, and regulated by the Chinese and U.S. governments, respectively.

The Chinese government props up Baidu; the U.S. government props up Delta.

[Hot Shoe]

Sounds like the bears are trying to get organized for another raid on BIDU like last winter and Krieger is trying to be a catalyst.

[InvestorsLive]

Looking at the following for Monday, all the big boys will take a break and consolidate (GOOG, AAPL, BIDU, RIMM, V, MA) its only healthy... now we have the MSFT YHOO saga...

www.investorslive.com/blog/2008/05/sunda... /

[huafang liu]

baidu is a gang

[huafang liu]

china is not us,baidu is not google

[NOBLE77777]

The chart tells us that the first gap needs to be filled is at about $350 and the next is at about $320.

[bidu4X]

This guy was probably saying the same thing when BIDU was at 90. That's when I bought and it is now up 4X. I'm sure this guy would love to buy BIDU at 90 now (forward PE of just 14 after all). In a few years he will will wish he could buy BIDU at 400...but 1200 is abosoutley crazy he will say. Keep shorting and you will soon lose your shorts.

[Ames Tiedeman]

The valuation is crazy. They keep buying the stock. When does it crash?

[Totem Pole]

its come to my attention that when China sparks, it will all go up in flames. where will that leave us, krueger? you can't change the market in one article, but when the prices for oil change you will be jobless and the evidence of this valiant effort will cease to exist.