Thursday, July 27, 2006

Goldman comments on (BIDU)

- Goldman Sachs comments on (NASDAQ:BIDU) noting the company reported 2Q2006 gross revenue of 192mn RMB (up 175% yoy), which was slightly below both firm's 193mn RMB forecast and the high end of guidance at 193mn RMB. Exceptional growth was driven by 69% yoy growth in new advertisers with spending per advertiser up 30% yoy. Despite robust growth and significant upside in EBITDA margins, they believe results are negative for the stock given that investors have set an aggressive bar for Baidu to exceed in order to justify the stock's current valuation, which is at a 100%-plus premium to both premier Chinese and US Internet companies including Google, a fast-growing US company.

Firm thinks the shares will likely be under pressure given that in-line revenue should temper investor expectations, combined with a pending lock-up of 16mn shares (10 day average is ~3.3mn) on 8/13/2006. A 100%+ premium EV/EBITDA multiple to Google (especially given the typical Chinese company discount) generally implies that investors need to see revenue outperformance to drive the shares higher. A significant stock pullback could create a more opportunistic entry point. Firm is raising their top and bottom-line expectations, which result in a slightly higher 6-month price target of $70 vs. $67 previously. Significant margin expansion from current levels may be less likely given the investment opportunities, capex ramp, and increased competition.

Based on an after-market close of $78.50, BIDU shares have ~10% downside and continue to trade at a significant premium to its US and Chinese peers at a 2007E P/E and EV/EBITDA of 49X and 37X vs. the US medians at 27X and 11X and the Chinese medians at 20X and 14X, respectively.

Notablecalls: Notice how it bounced off the 200 day moving average in after hrs trading. This is the level it needs to hold. Bet Stevie went home unhappy but I suspect he has bigger plans with BIDU. Expect to see some takeover chatter develop in the coming days/weeks.

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