Q2 Preview: Baidu (BIDU) Continues to Lay Foundation for Solid Growth in China

Shares of the Beijing-based search giant Baidu (Nasdaq: BIDU) are trading stronger Monday into its second-quarter earnings report, expected out after the market closes. Shares are up 1.5 percent on the session.

Expectations are for Baidu to report EPS of 66 cents on revenue of $502.30 million. Such earnings would be a 40.4 percent increase from the 47 cents per share last quarter, and an 89 percent rise from the same period last year.

Baidu shares showed moderate gains through the quarter, rising 1.7 percent to $140.13 at the end of June. The stock is up 11.5 percent since then, and an impressive 62 percent on the year. Shares have traded in a range of $76.00 to $157.33 over the last 52-weeks.

The stock currently trades at about 39x fiscal 2012 earnings estimates, compared with 14.9x for Google (Nasdaq: GOOG), 62x for Chinese Internet peer Sina Corp. (Nasdaq: SINA), and 21x at AOL, Inc. (NYSE: AOL).

Data from Bloomberg has 29 analysts with a Buy rating on Baidu, three at Hold, and one suggesting to Sell. The price target average is $168, with a low of $107 and high of $200.

Whether Baidu beats estimates in the quarter, there are a few key items to consider. First, Baidu is enhancing it's English search results via a partnership with Microsoft (Nasdaq: MSFT). Currently, users who search with English on Baidu end up with Chinese character results. Microsoft's Bing search engine will help to improve these results.

Next, Baidu is making strong moves to expand it's offerings. Announced in July, Baidu will now offer licensed music to users through an agreement with One-Stop China (OSC), a joint venture of notable music labels.

Baidu has made moves into the online real estate realm, as well as investing in online travel search engines.

The moves underscore Baidu's commitment to expanding is brand, making it tougher on Google should it want to re-enter the Chinese market.

Analyst Commentary

• Deutsche Bank is bullish on Baidu into the results. The firm sees revenue of RMB 3.288 billion, with gross margin of 79 percent and operating margin of 56 percent. Commenting on a recent roll-out of a national marketing campaign in China, Deutsche says, "During the campaign, Baidu held around 200 marketing events in more than 150 cities. There were 3,000 company attendees in Beijing, the first stop of the campaign, representing a 500% YoY increase. During the entire national campaign, Baidu executives, together with the Ministry of Commerce, local government & industry experts, discussed online search engine marketing solutions. According to Baidu, the campaign attracted 129,006 SMEs."
  
  
• Collins Stewart sees EPS of 67 cents and revs of $514 million. "While street estimates already bake in 73% organic growth, we believe there is a good likelihood that Baidu could beat given strong search market growth, increasing large advertiser spend, new initiatives, and better than expected operating leverage."
  
  Search in China has grown 61 percent to about $668 million in the second quarter. The growth is a slowdown from 68 percent in the first quarter. On search spending, Collins Stewart says "agency checks suggest search ad spend from large advertisers is growing faster than small and medium businesses; and medical and e-Commerce verticals are growing faster than other verticals. Based on our agency checks and 1H11 search trends (spend up 64% Y/Y), we believe China search market Y/Y growth in 2011 will likely exceed our prior forecast of 54%."

Stay tuned to StreetInsider.com's EPS Insider section to see our analysis of the highly-anticipated quarterly results within seconds of the release.

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