Rohan on Baidu (BIDU): Stock Has Not Yet Begun To Rise

We still own a bit of that China moonshot known as Baidu (we dumped the majority a couple hundred dollars ago, unfortunately), so we’ll let RBC analyst Jordan Rohan take it away:

In-line 3Q07 and 4Q07 guidance showed the difficulties of operating in a nascent market as Baidu faced disturbances to its traffic and direct sales force integration in Shenzhen. We view the former as a one-time event and expect the company to execute through the latter. Midpoint of 4Q07 guidance still implies 109% YOY growth, which is an acceleration from 3Q07. Our estimates move up modestly, and our target is now $345. Our long-term fundamental outlook remains bullish and we believe Baidu should remain a core holding in any Internet investor’s portfolio. Maintain Outperform rating.

Can’t say we agree with that bit about “core holding in any Internet investors’ portfolio,” given the 112X 2007 EBITDA valuation, but hey–revenue’s doubling every year, it’s China, and it’s fending off the Google competition, so we’re in no hurry to ditch the regrettably few shares we have left.  The “Google of China”?  Sounds great!

The market’s issue with the results, by the way, was primarily the in-line guidance.  Baidu has gone through a number of these fear-vs-greed panics before.  Here’s Jordan’s take on the guidance and results:

Gov’t Activity and Sales Force Reorg Likely Resulted in Muted Guidance: Although the management team did not quantify the effects directly, we believe these two issues did have an effect on 3Q07 performance and 4Q07 guidance. Gov’t activity is likely one-time event, and Baidu has already successfully integrated a larger territory (Shanghai) in the past to its direct salesforce.

In-Line 3Q07 Results:
Revenue was in-line at $66.3mm vs. our $66.5mm, consensus $65.5mm, and guidance $64.6mm-$66.5mm. EBITDA margin at 48% was better than expected as Adjusted EBITDA came in at $30mm vs. our $29mm. GAAP EPADS, aided by a lower tax rate ($0.03 effect) was $0.70 vs. our $0.62, and consensus $0.63. Pro forma EPADS was $0.72 vs. our $0.68.

4Q07 Guidance Also In-Line:
Guidance range of RMB560mm-RMB575mm($74.7mm-$76.7mm) was essentially in-line with consensus but slightly shy of our expectations. Midpoint of guidance implies 109% YOY growth, which is an acceleration from 3Q07 levels.

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