Baidu.com (BIDU) Has a Hiccup, Shares Plunge

October 27, 2009 7:45 AM EDT

Shares of Chinese search engine giant Baidu.com (Nasdaq: BIDU) are under pressure today following disappointing third-quarter results and fourth-quarter guidance, released after the close.

Baidu.com reported a third-quarter EPS of $2.16, ex-items, versus the analyst estimate of $1.81. Revenue for the quarter was $187.3 million, which compares to the estimate of $187.79 million. Revenues rose 39.1 percent in the quarter.

For the fourth-quarter, Baidu.com sees sales of $174 million to $180 million, versus the consensus of $202.9 million. The sales guidance represents 32 percent to 36 percent year-over-year growth. This forecast reflects Baidu's current and preliminary view, which is subject to change.

Baidu.com is synonymous with search engine in China, the world’s largest internet market. The company is expecting revenue and earnings growth to be hampered through 2010 due to the roll-out the new brand Phoenix Nest.

This rebranding move may open the door for Baidu's competitors to move in and take a piece of China's substantial market. Companies that may benefit are Sina Corp. (Nasdaq: SINA) and the world-leader in internet search, Google (Nasdaq: GOOG). Google has been looking to get its hands on a piece of the pie in China, and the move for Baidu.com may have provided an opportunity.

Baidu's Chairman and CEO, Robin Li tried to ease the minds of the company's investors with statements in a conference call after reporting the third-quarter results. "With 70 percent of customers already using Phoenix Nest, we believe this is the right time to complete the switch to the new system," stated Li. "The move to a single upgraded bidding platform will more efficiently utilize company resources and relieve customers from the burden of maintaining two systems. We are confident that Phoenix Nest will deliver tremendous benefits to our users, customers and Baidu."

When asked about why now was the time to switch over to Phoenix Nest, Li said that since the company has been running both systems is suboptimal. Phoenix nest has been available to the public and the stress of maintaining both systems has hurt the consumer experience and customer service. Li added that over time it would be difficult to get the most out of the Baidu.com with both systems running.

Gene Munster, senior analyst with Piper Jaffray, believes that in the long term this move might give Google a chance to take some of the market share away from Baidu.com in China. However, Munster iterates that in the long-term this move to accelerate the transition to Phoenix Nest will create a more user-friendly experience on the website. Piper Jaffray is maintaining a Neutral rating on Baidu.com.

James Mitchell of Goldman Sachs reiterated a Buy rating on the search engine stock, noting that the transition will not cause long-term market share loss. Mitchell believes that advertisers looking to market to consumers using search engines in China will have little option on where to place ads since Baidu.com has a stranglehold on the market.

Shares of Baidu last traded at $376.22, down 13 percent from the close on Monday. Google is trading at $551.06 before the market opens. Sina Corp. is at $40.32.

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• Piper Jaffray
• Gene Munster

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