Baidu Earnings Preview: Third Quarter 2008

Baidu.com (BIDU: 130.58 +0.84%) is scheduled to report third quarter 2008 results after the market closes on Wednesday, October 22. Based on our analysis, we at eChristianInvesting are expecting BIDU to report better than expected results that beat Wall Street’s expectations.

Analyst Expectations

We are forecasting revenues of $136.9 million and EPS of $1.32. This would represent a 106% increase in revenues from last year’s $66.3 million in the same period. The current analyst consensus calls for revenues of $134.7 million and $1.25 EPS. On July 23, the company gave 3^rd quarter guidance for revenue of $132 - 136 million.

While the Chinese macro economy has certainly experienced the effects of the global recession, we feel that the negativism regarding Baidu.com’s business has been overdone and expect a solid quarter based on the following three assumptions:

·        Google’s better than expected 3^rd quarter results – including 39% growth in international revenues.

·        The Beijing Summer Olympics provided a mid-summer boost to online traffic which we believe has continued post-Olympics.

·        Pessimism over the Chinese internet industry has been way overdone. Yes, China is facing an economic slowdown, but internet companies there are still getting the benefit of massive online adoption by the world’s largest population.

Share Performance

To date, Baidu’s shares are down 35%. This is basically in-line with the 33% decline in the NASDAQ this year. BIDU’s shares have been one of the few gainers of this abysmal October, as investors appear to be buying into the stock ahead of the quarterly results on Wednesday.  

Valuation

Shares are currently trading at a lofty 37x consensus 2009 EPS estimates. This is a rich premium to the relative valuations of their peer group. However, this premium would appear to be well deserved when you consider that analysts expect Baidu to grow 60% next year.

Recommendation: Hold with a $245 price target.