Baidu.comâs (BIDU) financial results for the first quarter again exceeded the market consensus. Being 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. Although fierce competition from Google (GOOG) and Yahoo (YHOO) prevents Baidu from building a wide economic moat, and Baiduâs Japan expansion will continue to negatively affect its financial results, we consider Baidu currently undervalued based on its growth prospects.
On April 24, Baidu announced its unaudited financial results for the first quarter ended March 31, 2008. For the first quarter 2008, its total revenues increased to RMB574.4 million (US$81.9 million), representing a 108.4% increase from the corresponding period in 2007. Operating margin in the first quarter of 2008 decreased to 27.3% from 28.5% of the corresponding period in 2007. Net income in the first quarter of 2008 increased to RMB146.6 million (US$20.9 million), representing a 71.5% increase from the corresponding period in 2007.
Diluted earnings per share for the first quarter of 2008 were RMB4.22 (US$0.60), compare with RMB2.47 for the first quarter of 2007. The stock is currently trading at 94.4x 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 57.7x our estimate for fiscal year 2009 earnings per share.
Using a P/E multiple of approximately 71.4x our fiscal year 2009 earnings per share estimate yields a target price of $450, which we believe reflects the companyâs growth prospects. Therefore, we are maintaining a Buy recommendation for Baiduâs stock.
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