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What is Baidu.com's (BIDU) Stock Worth?

March 4, 2010 2:26 PM EST
Chinese search engine Baidu.com (Nasdaq: BIDU), often referred to as the Google of China, has seen its shares lift-off into orbit as the growth of Internet usage in China explodes. In addition, with Google (Nasdaq: GOOG) possibly leaving the country, any serious competition could be removed.

According to data released in early 2010, there were 384 million Chinese internet users in 2009 up 86 million from 2008. Even with the large increase, only 29% of the total Chinese population use the Internet currently. These trends are a clear positive for the search provider.

In January 2010, Google surprised the market after announcing that it will stop censoring search results and may completely pull out of China due to computer hackers tricking human-rights activists into exposing their email accounts to others. While it originally looked like Google would leave China imminently, the two sides are now talking. Google recently stated before a Senate Judiciary Committee panel that it has not set a deadline for ending search censorship in China. The process could be long and could get very heated politicly between the government's of the U.S. and China. If Google eventually exits China, Baidu.com would benefit tremendously as it would become the only option for searchers and advertisers.

While the reasons mentioned above are two very big positives, there has been a few concerning top-level management departures. The executives that left cited "personal reasons." This is something investors should keep an eye on.

With all the momentum going Baidu's way, shares have surpassed any traditional valuation metrics. Shares currently trade at $523, or a P/E of 55x the 2010 EPS consensus of $9.52 and 38x the 2011 EPS consensus of $13.89. As a comparison, Google trades at a P/E of 20x and 18x their 2010 and 2011 consensus EPS, respectively.

So how should one value Baidu? - and - Is there any more upside in the shares? Below are some valuations methodologies Wall Street analysts are using:
  • Goldman Sachs comes up with a $575 price target, derived from a DCF analysis based on estimates for RMB 13.9 bn in FCF in 2017, a WACC of 13% and perpetual EBITDA growth of 6%, implying a terminal year EBITDA multiple of 14X. The firm thinks the significant valuation premium is warranted due to strong secular tailwinds supporting the search market opportunity in China. The firm has a Buy rating on the stock.
  • UBS comes up with a price target of $567 based on 58x 2010E PE, which they said has reflected the possibility of Google's exit from China. The firm's view incorporates a 50% weighting to their base-case valuation of US$522 (Google continues to operate in China) and a 50% weighting to our bull-case valuation of US$612 (Google leaves China in Q210). The firm recently downgraded shares to Hold on valuation concerns.
  • Kaufman Bros has a $540 price target based on 40x 2011 PF EPS. They rate the shares Hold.
Until the strong growth of Internet users moderates, it appears Baidu will continue to trade at a significant premium to the market. How large this premium should be can be debated. One guide could be to use a 40-50x multiple on 2011 earnings. If it gets above that, or about $700 per share, investors may want to look elsewhere to play China's amazing internet growth. But based on this, upside still remains.

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