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Baidu.com's (BIDU) financial results for the fourth quarter again significantly exceeded the market consensus. With China's most popular search engine, Baidu has an advantage over rivals in China's fast-growing online advertising market.
In addition, Baidu continues to expand its product lines to attract users and boost revenue. Baidu has successfully increased its market share in the Internet search industry in China in the past four years. Its market share in 2006 was 55.2%, compared with only 28.7% in 2005. This uptrend of Baidu continued in 2007.
It is widely believed that currently Baidu has more than 60% of the market share in the Internet search industry in China. Based on statistics of .comScore, Baidu's market share in the world is only behind Google (GOOG) and Yahoo (YHOO).
According to the China Internet Network Information Center, Baidu is the first choice for nearly 75% of Chinese search users. Although fierce competition from Google and Yahoo prevents Baidu from building a wide economic moat and Baidu's Japan expansion will continue to negatively affect its financial results, we think Baidu is currently undervalued based on its growth prospects.
The stock is currently trading at 62.2x our estimate for fiscal year 2008 earnings per share, which is significantly higher than the industry mean and that of its Chinese peers. The stock is also trading at 41.4x our estimate for fiscal year 2009 earnings per share. Using a P/E multiple of approximately 50x our fiscal year 2009 earnings per share estimate yields a target price of $315, which we believe reflects the company's growth prospects. Therefore, we are maintaining our Buy recommendation for Baidu's stock.
Read the full analyst report on BIDU.
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