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Baidu Rally Runs Far From Reality Check

The "Chinese Google" has stretched the limits of stock valuation


Did you miss out on the recent rounds of investment in Facebook? Do you long to put your money into a company that appears to offer an impossibly great promise like Microsoft (NASDAQ:MSFT) offered in the 1980s, Dell (NASDAQ:DELL) in the ‘90s and Google (NASDAQ:GOOG) when it went public in 2004?
Facebook isn’t going public until next spring at the earliest — or so its CEO claims — but those who are easy with tossing fundamental analysis out the window in the name of an outrageously, if potentially, great future of profit growth might look to another company already trading on public exchanges: Baidu (NASDAQ:BIDU). 

Baidu listed shares on Nasdaq in 2005 to a mixed chorus of cheers and doubts. At first, the cheers drowned out the doubts — Baidu rose 354% on its first day of trading, then went sideways for a couple of years as the company’s results struggled to live up to those early expectations. The doubters rejoiced.
For the past four years, the stock has been conducting one of the market’s most sustained end-zone dances in recent memory, rising from $10 (adjusted for a 10-for-1 stock split last May) to $119 at Monday’s close.
Viewed as a growth stock, Baidu is a star. Whatever bearish arguments are tossed at the company, its stock manages to push higher. But Baidu is also luring investors with better-than-expected earnings, a game cunningly played by Intel (NASDAQ:INTC), Apple (NASDAQ:AAPL), Google and other marquee tech names.
Baidu’s recent earnings offer more fuel for the growth bonfire. The company posted revenue of $371 million, up 94% from the year-ago quarter and 3% above the estimate of Wall Street analysts. Its earnings per share of 50 cents came in four cents better than expected.
That’s all well and good, but when those results are measured against Baidu’s stock price – well, that’s when things start to get surreal in a Web 2.0 sort of way.
Since Baidu posted its fourth-quarter results for 2010, the stock has hovered just below $120. At Monday’s closing price of $118.96, Baidu is 77 times its 2010 earnings. And it’s 34 times its 2010 sales.
Let’s put that in perspective: Google — the American version of Baidu, and, frankly, the model for Baidu’s success – closed Monday at $614.29, or 23 times its 2010 earnings and 7 times its earnings. (NASDAQ:AMZN), a stock famously yet perennially exalted above its fundamentals, trades at 70 times its historical earnings and 2 times its revenue.
And Facebook? Inside the private market’s herd-mentality vacuum of witless but cash-rich investors desperate to latch onto the next big thing, Facebook has been selling at 25 times revenue and God-knows-what times the profit it made from its ability to apply a harness to the private web’s herd-mentality vacuum of witless but time-rich losers desperate to latch onto the next big thing.
Baidu isn’t trading at that laughable 25-to-1 revenue ratio that Facebook is enjoying. It’s trading at an even more absurd 34-to-1 ratio. Except no one is laughing. They’re actually kind of applauding.
In other words, the same people who are hungry to invest in a social web they will never understand are even more hungry to invest in a Chinese web they will never understand.
Which means Baidu will keep going higher, barring some catastrophe — political, economic or otherwise. The company isn’t so much innovating as much as it is copying Google’s playbook: Its vaunted Phoenix Nest is Adwords redux. Baidu Union echoes Google’s effort to put sponsored links on non-search sites. Baidu has maps, news, videos — even some tentative stabs at social networks. Just like Google.
It’s tempting to think Baidu is Google in China minus five years. And it kind of is an intelligent way to navigate the web once you are on it long enough to be confused by it. Never mind that Baidu’s share of keywords had risen since Google did the right thing and pulled out of China. 

 Sometimes the past repeats itself, as Baidu is replicating Google’s story in China. But Google never became as expensive as Baidu is now. In fact, Google’s earnings growth slowed earlier than many — including its founders — expected. The question facing Baidu is how long its earnings will grow – and whether they grow fast enough to meet investors’ outsized expectations.

Article printed from InvestorPlace Media,

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