iBooyah.com Investment Matters

Despite the negative tone, Baidu (BIDU) kept on chugging along posting impressive growth and revenue numbers.  Since hitting bottom in Feb. 2006, this stock has fought its way back to above $120/share.  The recent partnership with Microsoft is a sign of legitimacy and attitudes are beginning to change.  The partnership calls for Microsoft to use Baidu (BIDU) search ad platform on Microsoft’s Chinese sites.  Obviously, this is a huge win for the company with predictable revenue stream.

This leads us to ask, is Baidu the key to China?  Despite valiant efforts by Google (GOOG), Microsoft (MSFT) and Yahoo! (YHOO) to capture the Chinese search market, none of these American Companies have really emerged as the clear leader.  Although smaller in size and resources, Baidu has managed to maintain its market share and lead. It is becoming clear that for any American companies to do business in China, they must partner with a Chinese company.  For example, Yahoo! has partnered with Alibaba.com, Ebay just announced a deal with Tom Online and of course, Microsoft is cozying up with Baidu.  Our prediction is MSFT will eventually buy a stake of Baidu in 2007.

Baidu’s stock valuation is off the map, trading with a P/E of 156.70, this stock is about 2.5 X more expensive than Google (GOOG).  Baidu’s valuation makes GOOG seem cheap at P/E of only 58.  This crazy valuation makes us nervous as it is a huge risk factor. For any company to maintain this type of valuation they’ll not only need to handily beat their numbers, they must post numbers that will make your mouth drop. I mean, investors need to go, WOW!! Although the revenue has been impressive, Baidu is not there.  The question remains if it will ever get there.  Is this stock another dotcom waiting to pop? Only time will tell, too hard to call for now.

For the sake of argument, the Chinese market is huge and the projected internet user growth is “super size”.  In fact, I recall reading an article where it is estimated by 2010, there will be at least 250 million Chinese online.  To put things into perspective, the U.S. only has about 100 million and the internet has been widely available here in the states for over 10 years now.  For a country that has over 1.3 billion people; the projected growth is mind boggling.  Perhaps if we look at this way, the valuation is perhaps justifiable.  Coupled with the potential for a MSFT buyout, maybe at $117/share, this stock isn’t as expensive.

Again, this is a hard one to call.  If you’re a gambler, this is one stock you might consider as the potential payoff is high.  However, if you’re not comfortable with high risk, better stay away from this one.