By Jim Woods
If you’re a China bull, you may be feeling a little queasy today. That’s because China’s premier Internet search site, Baidu (BIDU) gapped down sharply (nearly 13%) in early Tuesday morning trade following its rather ugly fourth-quarter revenue forecast.
The forecast was issued as part of the Beijing-based company’s 42% leap in third-quarter profit over the same period a year earlier. The profit of $2.07 per share easily bested consensus Street forecasts for earnings of $1.81 per share, and Baidu’s revenue also rose sharply in Q3, surging 39.1% from the same period a year ago. Of course, traders largely ignored this bit of good news and focused on the negative outlook.
The company said that it expects a “temporary negative impact” on fourth-quarter revenue as it completes the transition to its new online advertising system, called Phoenix Nest. This new advertising system will come with growing pains, and I think Baidu was smart to admit that revenues will be down because of it.
But as an investor, think about what this really means. By taking a little short-term pain in the fourth quarter while they adjust to their new advertising system, Baidu’s revenue will be down. But does that change the company’s fundamentals in a significant way? I think not. The only thing the new advertising system will do is allow Baidu to increase revenue in over the long term.
In a note to clients, Paul Keung, analyst with Oppenheimer & Co., wrote the following: “We believe the transition will result in short-term pain, but long-term gain in terms of monetization as (Phoenix Nest) increases the matching of more relevant paid links resulting in higher click-through rates.” Bingo! In my opinion, Keung has nailed the essence of what the Baidu forecast means to investors.
Here’s another way to think about it this situation. China, by far, has the world’s biggest population of Internet users, with approximately 338 million people online as of the end of June, according to official state numbers. This means that the number of Internet users in China is larger than the entire U.S. population. Also, Chinese Internet usage is growing at double-digit annual rates. Baidu dominates China’s Internet search market, with over 60% market share.
The only real threat here is Google (GOOG), which has approximately 30% of the market. So, do you really think the company’s revenues are going to slide because Baidu is adopting new, better advertising technology? I think not.
Fortunately for those who have not yet established a position in this Chinese Internet giant, I think this is your big buying opportunity. With the shares gapping down in today’s trade, I would be a buyer of the stock here. There has really been no material change in any of the company’s long-term fundamentals, nor has there been a change in the China growth story. In fact, that growth story continues to outpace even the most optimistic estimates.
As my friend and China expert par excellence Robert Hsu told me today, “Last week we saw China report GDP growth for the third quarter of 8.9% year on year, up from 7.9% in the second quarter. This figure is right in line with what I expected, and it indicates that China will likely achieve 8% annual economic growth for 2009, which was the target set by the Chinese government earlier this year.”
The China growth story is alive and well, as is the Baidu growth story. If you’ve been waiting to take your portfolio to the Far East, then today’s sell off in BIDU just may be your opportunity.
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There are incredible opportunities in China right now — if you know where to look. China expert Robert Hsu reveals the best industries and three top companies to invest in for big profits. Read his latest investing guide here.