How Do You Spell Money in China? B-A-I-D-U

Chinese search engine Baidu BIDU reported third quarter earnings last night that simply blew estimates out of the water. The company reported earnings of 86 cents per share on $654.7 million in revenues. Wall Street analysts were looking for the China-based company to report earnings of 83 cents per share on $618.6 million in revenues. In addition, the company said it expects fourth quarter revenues to be between $691.4 and $711 million. Wall Street technology analysts had expected $647 million in revenues. Despite the strong earnings and guidance, Brean Murray lowered the price target to $175 from $185, but did maintain its Buy rating on shares. As such, shares are sharply higher today, in an otherwise benign market. Shares are currently up around 4%, to around $144, but had been up as high as $150 in after-hours trading last night after it reported. Robin Li, chairman and chief executive officer of Baidu commented in a statement that, "Baidu recorded stellar results in the third quarter driven by rapid growth in customer spending and user traffic. In particular, spending by large customers significantly outperformed our expectations as we continued to build strong relationships with high quality companies. China's search industry is still in its early stages, and as the clear industry leader we see enormous room for continuing growth as users and online marketing customers become increasingly sophisticated." "On the user front, during the third quarter we launched a personalized homepage feature which provides users with a Baidu experience uniquely tailored to their individual online behavior, as well as instant and centralized access to their online social activities," Mr. Li continued. "As we continue to create new ways for users to engage with the Internet, we believe that more and more people will rely on Baidu as their online gateway, further solidifying Baidu's position at the heart of China's Internet ecosystem." Baidu is dominating search in the world's largest country, and is absolutely destroying Google GOOG. According to iChinaStock News, as of the end of the third quarter, Baidu had control of 77.7% of China's search engine market. Google has 18.3% of the market, but that has fallen by more than 10% since 2011 started. In addition to this impressive metric, Baidu said that its active online marketing clientele was up 11.8% year-over-year. The company also announced a new new advertising keyword bidding system, known as Phoenix Nest. This is very similar to Google's AdWords, which has helped the Mission View, CA-based search engine become so profitable. When Google left China in early 2011, many saw this as a huge positive for Baidu, and this thesis has played out. Strong revenue growth in Baidu should help benefit the Chinese Internet sector as a whole, with names like Sina SINA, Sohu SOHU, and CTrip.com CTRP benefiting. The company is not without its warts though. The SEC has looked into the name in the past for accounting issues, although nothing has come out of it. There has been a healthy skepticism on Chinese accounting, especially after names like Sino-Forest earlier this year. Baidu is a high beta name, and trades at 32 times expected 2012 earnings. Despite this, Baidu has grown revenues almost 90% year-over-year, and earnings grew 90%+ percent as well, indicating that Baidu is worthy of the high earnings multiple, at least for now. China, Internet, and a company growing revenues and earnings over 90% year-over-year. Not a bad combo. ACTION ITEMS:

Bullish:
Traders who believe that Baidu will continue to see sharp growth in China might want to consider the following trades:

• China has over 1.2 billion people. Their middle class is growing tremendously and will want to have all of the luxuries the upper class has. This could be good for names like Sina, Sohu, and CTrip.com, as well as Baidu.

Bearish:
Traders who believe that the accounting issues are still a major concern may consider an alternate positions:

• Any major problems of an accounting concern by the SEC could cut Baidu shares sharply. It is a highly volatile name. Traders might want to short it if they believe the accounting issues are going to be an issue.
  
  

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