Baidu.com (BIDU) reminds us of Amazon.com
4-27-07: Like most people we had our doubts about Baidu’s (BIDU) ability to live up to its expectation given the high valuation and mediocre profit. While we feel this stock is still expensive and about to get more so, last quarter’s earning (Q1) took everyone by surprise as the company blew past estimates. Most analysts covering the company were caught off guard. In our view, this is a testament to how vast the opportunity in China really is. To put China’s growth into perspective, the government recently reported over 12% growths in GDP. This is about three times higher than the U.S. economy.
In response to the great quarter, BIDU is up over 15% percent, now trading around $120 per share. Does this company deserve this high valuation is the question. In our view, Baidu.com represents what Amazon.com (AMZN) was during the hay days of the internet bubble. If you recall, AMZN was a Wall St. darling during the internet bubble, trading at insane P/E. We all know how that ended.
To be fair to BIDU, the company is actually profitable as oppose to AMZN lack of profit during that period, but the euphoria is very similar. Here is a company with great potential in an emerging market (China). The growth potential is immense. Perhaps the traditional methods of valuing companies are inadequate for a company such as Baidu.com. This same question is being brought up again with most Chinese companies.
Being a 100% Chinese owned is perhaps a major advantage for Baidu.com. In a society where nationalism is still highly valued, we believed BIDU have something no foreign companies’ have- national pride and loyalty of their users and advertisers. Recent partnership with Microsoft and other major U.S companies should help BIDU corner the Chinese Search Market. The recent expansion into Japan is a bold move and holds great promises as Japan’s economy is highly connected to the internet.
In any case, Baidu.com is an interesting company. We will continue to monitor BIDU, but will not buy at these levels. Our target entry price remains in the high 80s or low 90s. Hopefully the market will again allow us the opportunity to buy someday.
