Chinese internet search engine company Baidu (Nasdaq:BIDU) delivered sensational fourth quarter earnings. Revenue rose 94% while earnings soared 171%, and the company raised guidance. The market sent the stock up over 10%. (This emerging market is making strides in regulation and disclosure. Check out Investing In China.)

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Sweet Fruits of the Quarter
Baidu is dominant in China's internet search. It benefited from Google's (Nasdaq:GOOG) pullback from China in 2010 along with its own growth initiatives, as Baidu captured more market share. It now holds 70% of the Chinese online search market. Revenue rose from $184.7 million in the previous year's same quarter, while net income skyrocketed from $62.7 million to $175.9 million, or 50 cents a share.

Online marketing revenue grew, as did revenue per customer, which more than doubled in the year over year quarter. Traffic acquisition costs dropped as a percentage of total revenue. Baidu has been attempting to broaden itself beyond search into ecommerce online video, and social search, to increase overall monetization. For the full year, Baidu's revenue grew by 78% year-over-year with net income up 137%. Revenue and earnings are expected to grow by 60% in 2011.

Chinese Internet Stocks
Other Chinese internet stocks are sharing in the good fortune. Sina (Nasdaq:SINA) stock was on the rise as good earnings news was expected. Changyou (Nasdaq:CYOU) reported a 30% revenue increase. Sohu.com (Nasdaq:SOHU), one of the most successful of this group, also had a strong quarter. There are other avenues of internet business besides search, such as online gaming and ecommerce marketing that these companies and others compete well in.

Some Sour Possibilities
Although Baidu is clearly dominant for now, some of its competitors continue to ramp up. Sohu's Sogou is growing rapidly. Also, while Baidu grew its number of customers in the fourth quarter by 24% over the previous year's quarter, its sequential growth rate was only 1.5% from the third quarter. Its increase of 4,000 customers over the third quarter dissatisfied critics.

While some feel Baidu's position is still unassailable, others don't agree. It's likely that internet competition among these companies will intensify in the next few years. Then there's the macro-consideration of the Chinese economy and the possible unpredictable policy moves China's government may make that can impact business.

Baidu's Growth
Baidu's CEO Robin Li said the company will continue to try to expand its business, including into social networking. With Baidu's sensational growth rate, the stock price has climbed accordingly in the last year, from $41 to $118 a share. It's too facile in hindsight to say long-term fundamental investors should have bought into Baidu's growth previously. But with a PE of around 77, even a forward PE of around 50, assuming $2.40 EPS next year, as a buying price it has to give pause. Baidu is still a great and growing company, but betting on it to sustain this kind of growth too far into the future leaves an investor with little room for retreat and even less margin for error.

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Tickers in this Article: BIDU, GOOG, SINA, CYOU, SOHU

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