3 Reasons Why Baidu Under $130 Is a Bargain

The market has turned its back on Baidu (NAS: BIDU) since China's search leader cranked out a disappointing quarterly report two weeks ago.

The company only grew revenue by 75%, and the midpoint of its top-line guidance for the current quarter was $3 million shy of Wall Street's target of $860 million.

With China itself projecting its heady growth to decelerate, Baidu's following suit. The revenue guidance for the current quarter calls for growth of merely 60%-64%. The dot-com giant doesn't provide full-year outlooks, but analysts have gone ahead and modeled just a 58% uptick at the top of its income statement for all of 2012.

I'm italicizing only, merely, and just because it's comical that these big numbers are disappointing. However, Baidu has been a dot-com darling for so long. It used to run much faster times at the combine when it wore a younger company's cleats.

Despite the deceleration and the perpetual concerns about the delicate nature of China's Internet freedoms, there are still plenty of good reasons to nibble on Baidu here. Let's check them out.

1.Baidu is still China's Internet darling
Just as we see the disparity between global paid-search leader Google (NAS: GOOG) and its Internet peers that rely primarily on lower-margin display advertising, Baidu stands out against China's other dot-com heavyweights.

SINA (NAS: SINA) and Sohu.com (NAS: SOHU) are solid companies, but they are struggling with the heavy costs of ramping up blog platforms and serving up chunky video files.

Sohu reported its quarterly results a few days after Baidu. During the same three months that found Baidu's profitability climbing by a better-than-expected 76%, Sohu's bottom line was cut in half. Display advertising was the margin killer, as brand advertising's revenue grew by just 7% as revenue costs in the division soared 69%. It won't get any prettier when SINA reports next week. Analysts see the company posting a quarterly loss on just 7% in revenue growth. SINA Weibo may be the Twitter of China, but it's apparently just as tricky to monetize.

Baidu doesn't just stick to its knitting. It has made logical moves to expand into online travel and even legal music downloads, but it has done so either through partners that bear the brunt of margin damage or by stepping in only if the venture will be lucrative on the bottom line.

2. Baidu's still a beater on the bottom line
Baidu may have narrowly beat out income estimates two weeks ago, but decelerating growth in revenue is a trend that analysts are baking into their profit models.

Wall Street is now banking on a profit per share of $4.61 this year and $6.42 come 2013. Just a month ago those same targets stood at $4.63 and $6.53.

It's dangerous to undersell Baidu's potential profitability since it has only missed analyst profit targets once since going public at a split-adjusted $2.70 seven summers ago. It has landed ahead of the pros 12 quarters in a row.

Source: Thomson Reuters.

Is it suspicious to find the company besting projections by a token $0.01 a share in each of the past three quarters? Is Baidu managing earnings? Even if that's the case, at least it has the ability to generate enough reported earnings to stay one step ahead of Wall Street. As long as that continues, betting against Baidu is more than just silly; it's dangerous.

3. Baidu will continue to close the valuation gap with Google
Google is a global winner. Baidu is just starting to expand overseas by brushing up on foreign languages. It's going to have a hard time stepping out from the world's most populous nation where users overlook its shortcomings because it's the hometown hero.

However, Baidu is in some ways already more successful than Google. Don't wait up for Baidu to overtake Big G in terms of revenue or enterprise value. Google's market cap is five times greater than Baidu's. But the combination of China's kind tax rates, low costs, and Google's penchant for splurging on low-margin initiatives finds the smaller Baidu generating far better net profit margins than Google.

Baidu is also growing its profitability at more than twice Google's rate.

Is Baidu expensive? Not really. A trailing P/E multiple of 37 isn't very attractive for a company where growth is decelerating, but it's still growing a lot faster than even that lofty markup. Looking all the way out to the $8.42 a share that analysts see Baidu earning in 2014 drops Baidu's earnings multiple to 15 -- and we've already been spoiled by seeing the company earn more than what even the aggressive modelers are expecting.

Investors will naturally want to keep an eye on China's economic growth and its Internet governing, but Baidu's more attractive than worrywarts think at this point.

Bullish on Baidu
A bullish call on Baidu has served me well on Motley Fool CAPS over the years. True to the CAPScall initiative, I'm not going to give up on it now. Baidu has soared 1,386% since I recommended it to newsletter subscribers six years ago, but now it's time to discover the next Rule-Breaking multibagger. It's a free report. Want it? Get it.

At the time thisarticle was published Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Motley Fool owns shares of Google and Baidu.Motley Fool newsletter serviceshave recommended buying shares of Google, SINA, Baidu, and Sohu.com. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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