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Baidu Hits A Bump

Posted: Oct 30, 2009 12:44 PM by Greg Sushinsky

Tickers in this Article: NTES, SINA, SOHU, GOOG, BIDU

Chinese internet search giant Baidu (Nasdaq:BIDU) reported healthy third-quarter earnings, but its outlook for the fourth quarter disappointed the Street. The dominant Chinese internet search company said it will feel the effects of its transition to its upgraded online marketing system, Phoenix Nest, into the fourth quarter of 2009 and likely into the first quarter of 2010.

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Growth With Transition
Baidu earned $72.2 million, or $2.07 per diluted share, versus $51.2 million, or $1.47 per share, in last year's third quarter. Revenue increased from $135.4 million to $187.3 million, its earnings and revenue both healthy, growing numbers.

The bump is in Baidu's outlook, which it has trimmed to $174-$180 million in revenue for the fourth quarter 2009, less than the original projected figure of $204.7 million.

Analysts are concerned that the revenue dampening transition to Phoenix Nest will continue into the first quarter of 2010. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Competitors Moving In?
As Baidu shifts to fully implement its new online marketing system, which is 70% in place, it is suggested by analysts that it's a move to embrace "short-term pain, long-term gain."

It is thought that Google (Nasdaq:GOOG) may be able to make further search inroads in Baidu's market, along with Chinese competitors SOHU (Nasdaq:SOHU) and Sina (Nasdaq:SINA). Sohu, with its online portal business, just had an earnings miss though its revenue was up, while Sina, an online advertising company, is expected to have a large increase in ad revenue in 2010.

Online portals and searches are not the only internet areas with large revenue potential in China. Online gaming company Net Ease (Nasdaq: NTES), is expected to continue to thrive in the growing gaming space, irrespective of the portal and search battles that go on.

Baidu's Prognosis
Baidu's problem, which is slightly slowing growth, should be confined to the next couple of quarters. Ultimately, the company feels its move completely to the Phoenix Nest system will be more beneficial long term than standing pat. It's also true that Baidu still faces competition in the online search and advertising business from Google as well Sohu and Sina, but Baidu has been astutely managed and should continue to be, though not without bumps.

The potential for a bubble in the Chinese economy and stock market should be carefully watched, too, as even though we've been positive on Baidu as a company, long-term investors should pay attention to its stock price. It has run up from $100.50 to as high as $439.90 in the last 52-weeks, and currently trades at $380.32 at a P/E of 66. Google, by comparison, is trading at 36 times earnings and has run up to $561, so again, long-term investors might be wary of overpaying for shares there, too.

The Bottom Line
For patient investors interested in a terrific sustainable growth story, the quarter or two transitional bumps notwithstanding, Baidu should continue to flourish for years as a powerful growth engine in China's still nascent, financially fertile internet fields.

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By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinky's literary work, see http://writing.gregsushinsky.com/.

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