Have you thought about buying shares in China's search engine stock Baidu (Nasdaq:BIDU)? The stock has a P/E ratio ranging from 40 to 50 and has already doubled from $120 to $240 in a torrid run-up in less than six months. Baidu faces serious competitive pressures from U.S. giant Google (Nasdaq:GOOG) and fast-growing domestic competitor Sohu (Nasdaq:SOHU), along with the jittery nature of overseas equity markets. All this adds up to avoidance, or at least some caution - doesn't it? Maybe not.

Earnings, Earnings, Earnings
One thing that has always hammered away at any approach to fundamental investing is the long-term value of earnings. Whether you are a follower of Graham and Dodd via Buffett, or you have in your mind's eye Peter Lynch's books with their two-page charts of jagged ink lines of rising earnings over the years, you never lose sight of the main idea. That principle is that earnings are the underlying value of a stock, and over the long term the stock price should reflect the value of earnings. Baidu's first-quarter earnings report showed a 41.1% rise in revenue, with a 23.5% rise in income. Add to this Baidu's estimated long-term growth rate of around 33%, and you begin to see why this stock is attractive despite some otherwise daunting numbers. (For more on analyst estimates, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Growth Is The Game
Baidu will not continue to have growth without challenges. Google is one of them. Its giant footprint will no doubt deepen in China, yet the untapped market for China is still huge. Investors shouldn't think in terms of the more limited growth potential metrics of the U.S. and western Europe when assessing China. Sohu, ostensibly a Baidu and Google competitor, is growing at a healthy clip and developing diverse operations. There's room for Baidu, Google, Sohu and likely more.

Despite the heat of the stock run-up and the heady growth of business for Baidu, its management is running a steady, solid business that emphasizes controlling costs and expanding its markets. For example, it's creating new tiers of service levels such as its Phoenix Nest, which is an enhanced bidding platform for professional online marketers.

Fierce Competition
Google continues to develop new approaches in the U.S. that refine and coordinate many of its search tools with applications such as cell phones and other electronic devices. Real-time searches, "smart" searches and enhancements such as Google Squared will be in place soon. Analysts predict that Google will grow its share of the search market in China from 23% in 2008 to 33% in 2010, which will dampen Baidu's share from its now-held 59% to an estimated 51%, according to a Credit Suisse analyst. But that's assuming all the alliances, partnerships and plans go off without any return salvo in the search war from Baidu, which is unlikely.

More New And Old Players
While Baidu may be watching Sohu and Google closely, China web portal ad seller and internet service company Netease (Nasdaq:NTES) is a new cash cow on the scene. The company has one-half the debt ratio of Baidu and currently sells for 17 times earnings, so it is another player to watch. The future of internet development in China must be looked at in total, too. In the U.S. and internationally, such companies as Yahoo! (Nasdaq:YHOO) continue to grow offshoots to their original businesses. Yahoo - though not the most robust competitor with Google, for example, in internet advertising - is still involved there and always has the possibility of being acquired or morphing into other branches of the closely aligned search, advertising, internet and mobile communications world. So, too, might any of the main Chinese players. Baidu ultimately need not limit itself to search.

The Future Of Baidu
The full extent of Baidu spreading its tentacles throughout China and beyond is yet to be seen. Even today it is not limited to China, nor will its eventual growth be limited to China. And nothing says Baidu CEO Robin Li's management team won't make some future savvy alliances of its own, or partnerships in closely related businesses. Also, China companies have, if not a friend, at least a careful observer in their own government, which may be ready to give a strategic boost every now and then. While the Chinese/Hong Kong stock market may be somewhat overheated now that it's off the lows of last year, investors should consider Baidu stock on a pullback as a long-term buy in what will still be a surprisingly attractive market for many years.

For more, read Investing In China.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!