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Leading Chinese search engine Baidu, the "Google" of China, may have finally run out of steam according to a recent Goldman Sachs report.
The company's market valuation has grown at a blistering pace since its founding and finally showed signs of slowing down this year amid increasing volatility. While the underlying business remains extremely strong, perhaps the stock price has grown too quickly the bank argues. Goldman Sachs, the bank that underwrote the company and brought it public in 2005, downgraded the stock from "Buy" to "Neutral" while Credit Suisse also recently tweaked its Neutral rating lower.
Baidu has posted an amazing 1,400% stock price growth since its IPO six years ago and has posted a 20% increase this year, even as the overall market has slowed. In fact, the benchmark Shares FTSE/Xinhua China 25 Index (ETF) which tracks major Chinese stocks is down 24% this year compared to Baidu's excellent performance.
Many economists expect the Chinese economy to slow from its historical 10% growth rate to a more modest 6-8% growth rate in the coming years. With this reduction in growth, it could be difficult for Baidu to continue growing over 100% annually as it has in the past, which has led to heady valuations like a price to sales ratio of over 26 and a price to earnings ratio of over 55.
See our full analysis for Baidu
Strong Underlying Business
We are still strong believers in Baidu's growth model. The company has proved that it can capitalize on the world's largest Internet population, even as hundreds of millions more Chinese are still yet to join the internet era.
Baidu is by far the dominant player in China with 80% of the Internet search market. As long as it maintains its dominant position in search and internet users rise as predicted, the company will continue to perform strongly.
Revenue per search is increasing from $4.50 today to $6 per 1,000 searches by 2013 as well. However, despite Goldman’s concern, we are more optimistic. While we believe the stock could take a breather in the near term, any signs that global growth is back on track and that the European situation is under control could lead to greater confidence in China’s growth which will support Baidu.
Our model currently says that the stock is fairly valued, but we will review it following earnings season.
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