BIDU Revisited

Why is Baidu overpriced? It is eerily similar to Google's earnings report. "Favorable tax rate" allowed Google to post blow out numbers. But when you dig below the favorable tax credits that Baidu got, it would have come in line to below consensus estimate by about 2 cents, depending on which consensus estimate that you look at. I think the consensus was .37 off the top of my head but the whisper was .40 eps. At any rate, their current revenue matched analyst consensus and then they lowered their projections for at least the next 2 quarters. No revenue growth! They are now trying to expand into Japan, but why? If China offers so much opportunity for growth, why not try to maximize their presence there first and then consider expansion into Japan? The capex expansion just to establish its presence in Japan is ludicrous! Do I have to remind everyone that China and Japan aren't exactly best buddies? In addition, search market in Japan will be a hard nut to crack with Google and Yahoo already having presence in that market. So why are they doing this when their revenue is now declining in China? The PE of 138.90 is based on the premise that they can continue to grow their earnings. This does not seem to be the case. In fact, from revenue stand point, we can expect that it will contract or remain static. While they have grown their yoy earnings to 16 million from 3.1 million. While on surface that may seem like a phenominal growth in earnings, roughly 500%, revenue contraction will catch up, especially with uncertain capex needed for Japan market entry.

What does all this mean? I expect that earnings will taper off as a result of this within the next 3 quarters and with continued competition from SOHU and Google, it will only get more difficult to grow. The Chinese internet adoption rate is at its early infancy with less than 10% of the population penetration. Perhaps that is why they are trying to enter Japanese market for additional growth. To me, it just doesn't make much sense.

I anticipate that the PE will continue to increase, but watch the PEG! It is currently trading at 2.40! You will see that expand as well in the near future. All told, this stock deserves a multiple of no more than 60, which would equate to a price of lesss than $60.00.

Next week will be interesting, I don't wish for anyone to lose money but in this game there are winners and there are losers. Good luck to all longs and shorts.