This Just In: Upgrades and Downgrades


At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Time to bail on Baidu?
No two ways about it -- no three ways about it -- this week has been a terrible week to own stock in Baidu . On Tuesday, Goldman Sachs slashed its target price by 34%, cutting the stock to $89 a share while slicing 22% off its earnings estimates for 2013, and another 30% off 2014 earnings.

According to the analyst, "mobile cannibalization and competition with Qihoo will pose structural threats to Baidu's high profit margins." Combined with slowing revenue growth and a potential alliance between Qihoo and Google , Goldman sees a much bleaker future for Baidu, warning the company could even "be displaced from its incumbent leadership in the online advertising sector."

And that was only the start of the bad news.

Soon after Goldman's harsh note, Barron's came out with a similarly downbeat opinion on Baidu, warning that they see little hope for the company's being able to monetize its mobile search traffic and highlighting a Citigroup report urging investors to "sell Baidu now" and not "bottom fish based on price chart or valuation."

Then, yesterday CLSA jumped on the bandwagon with a downgrade of its own. Echoing Citi's "sell" rating, CLSA cut Baidu shares to "underperform" on fears of slowing earnings growth, troubles with mobile monetization, and in a new twist, increased competition from a new search engine sponsored by not Qihoo, but Chinese e-commerce giant Alibaba.

Never rains but it pours
So, miserable news all around. And of course, it probably doesn't help fans of Baidu that at the same time as everyone is panning the Chinese Google, over at Bloomberg yesterday they were starting to talk up the Russian Google instead. In a column Wednesday, the business journal highlighted the fact that Yandex is currently selling at its "cheapest ever" price relative to Google -- raising the risk that investors looking for the "next Google" abroad, and discouraged by Baidu's flagging stock price, may decide to pull money out and give Yandex a spin instead.

But here's the thing: Even after its recent post-earnings sell-off, Yandex still costs 31.4 times earnings. That means the stock isn't actually cheaper than Google (24.7 times earnings). It's just a bit less expensive than it was prior to earnings.

In contrast, Baidu at a mere 18.6 times earnings looks objectively cheap -- relative to Google, relative to Yandex, and relative to a lot of companies, actually. And no matter what Goldman says, and no matter what Citi or CLSA say, either, the majority of analysts who follow these Internet search companies agree that of the three "Google-like" companies, Baidu is still the fastest grower of the bunch.

Analysts estimates currently have Baidu pegged for a profit growth rate of better than 30% annually over the next five years. That's three points better than the 27% rate assigned to Yandex, and more than twice the growth rate ascribed to Google.

Foolish takeaway
Should you be worried about the growing pessimism over Baidu among marquee-name investment bankers? Actually, I don't think so. To the contrary, maybe you should be getting more excited about the stock the less enthused Wall Street becomes.

Priced at the lowest P/E ratio of the big three search firms named, but boasting the highest growth rate of the bunch, Baidu doesn't look to me like a stock you should bail on. Instead, Baidu looks like a bargain.

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Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Baidu, Goldman Sachs, Google, and Yandex. The Motley Fool owns shares of Baidu and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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