RBC analyst Stephen Ju picks up where his predecessor Jordan Rohan left off–as a table-pounding Baidu (BIDU) bull. We’ve gotten a lot of questions about Baidu in recent days (folks wondering why the stock suddenly blasted off for the moon again). Today, Stephen has the answer: In his opinion, Baidu’s quarterly call tonight is going to be a blockbuster:
Baidu is set to report its 1Q08 after market close. After a challenging quarter, affected by weather and management change, traffic rebounded in February after the Chinese New Year and remained robust throughout March. We are expecting Baidu to beat 1Q08 estimates and issue 2Q08 guidance in excess of consensus. Street EPS estimates for 2009 should head higher after the report by about $0.50 to $1.00, and we expect our price target to follow accordingly. 1Q08 also saw Baidu open its API to multiple third-parties, which over the longer-term should help advertisers track campaign ROI more precisely. Maintain Outperform rating.
Guidance Once Again the Focus: 2Q08 is usually the quarter with the biggest sequential growth, as 1Q08 is the seasonal lull. As we have previously noted, each month during 2Q is better than the previous and we expect positive trends observed in March to continue to improve. We believe 2Q08 guidance could call for sequential growth as high as 35% vs. our current 29% and Street 33%. As a result, Street EPS estimates for 2009 should head higher by about $0.50 to $1.00 after this report.
[We are] in the Midst of Two Seasonally Strongest Quarters: One component of our upgrade thesis was that as Baidu entered 2Q, it will have every macro, secular and seasonal growth factor working in its favour. 2Q and 3Q have traditionally been the strongest quarters for sequential revenue growth, and historically, the biggest changes to our estimates to the upside have been around the issuance of guidance for 2Q and 3Q. We therefore suspect that our estimates are likely to increase yet again during the course of 3Q08.
Opening Up the API: Our conversations with advertisers suggested one of the factors that held them back from deploying larger budgets was the lack of a robust toolset to track ROI. With increased budgets come increased accountability, and for search advertising to become as efficient in China as it is in other parts of the world, this is one of the first necessary steps.
So we guess we’re still glad we own some shares of this “Google of China.” Based on Baidu’s distracting investment in Japan and Google’s gains in the China market, however, we’re not as comfortable about the long-term story as we once were.
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