Baidu: The 'Chinese Google' Looks Tempting

| About: Baidu, Inc. (BIDU)
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It may just be an emotional reaction to the wave of Baidu (NASDAQ:BIDU) chatter that seems to have washed across the web since Google (NASDAQ:GOOG) reported their blowout earnings, but I'm getting a little bit tempted to buy some shares of the Chinese Internet powerhouse.

Baidu is often referred to as the "Chinese Google", which I suppose is a good thing, and their core search product is quite similar. But clearly the Internet and its users in China are very different than they are here in the U.S., so it's important not to read Google's huge and rapid success with advertising and assume the same trend will follow for Baidu.

Here's what I like about Baidu:

1. Search engine advertising is a proven model.
2. Growth is spectacular in all areas -- users, market share, and earnings.
3. Their status as a homegrown company gives them both credibility in the marketplace and, probably, a significant advantage with local regulators.
4. They are diversifying their product offerings, including video downloads from MTV among other recent additions.
5. The balance sheet is strong, with no debt.
6. All the important margins are going up -- operating, profit, and ROE -- and going up pretty quickly as the business scales.

Here's what I don't like:

1. The search engine advertising model, though great, hasn't necessarily been proven to work in China. Clearly, we can't just assume that Google's success in the US means Baidu will succeed in China with a similar product.
2. While they have a huge first-mover advantage and the advantage of local "street cred," they're still fighting against (among others) Yahoo and Google, both of which are more than ten times their size. Google's efforts in China have been weak, but they've also thrown a lot of money at it very recently.
3. The immaturity of the Internet marketplace in China (very little e-commerce, very few credit cards) means the strong advertisers aren't necessarily there yet. Google might not be where it is today without Ebay (NASDAQ:EBAY) and Amazon's (NASDAQ:AMZN) advertising budgets.
4. They face the same click fraud problem as Google, but don't have nearly as strong a capability (largely because of their small size and newness) to fight it.
5. And of course, the valuation is dramatically high -- even with their difficult summer. I'm not as worried about this because of the potential to halve that PE ratio very rapidly, but BIDU certainly doesn't get the "China discount" on their PEG ratio that many companies do.

I haven't yet bought any shares (though I do as of this writing have a small position in call options), but I am fighting my way through these arguments -- the overwhelming potential for top line growth, growth that makes Google look like an old, stodgy company, is very compelling. I'm sure there are other strong arguments to be made both for and against, and I'd be happy to hear them.

BIDU 1-yr chart:

Full disclosure: I do own shares of Google and Netease, and a tiny position in Baidu call options.