Goldman Sachs comments on Baidu.com (NASDAQ:BIDU) following results saying the revenue shortfall was more pronounced than they thought from the 2 lost Beijing distributors.
Customer additions were well below expectations at approximately 12k versus GS 24k estimate and 16k in 2Q2006, which they believe is likely due to the distributor transition. While they expected limited upside to the high end of the range due to the lost distributors, they did not expect an outright miss and such low 4Q2006 guidance.
That said, firm's 2007 and 2008 estimates were previously too conservative and they have moved to revenue growth that maps closer to what Google saw. Firm is moving to a Neutral rating from Sell given ~10% upside to 12-month price target of $93 versus old year-end 2006 price target. Since initiating on 9/13/2005, the stock is up 7.3% versus the S&P up 12.3%.
Firm notes they would not buy Baidu stock as the execution challenges should last a few quarters. Prior to this quarter, their only issue with buying Baidu stock was its valuation. While higher 2007 and 2008 estimates make valuation more reasonable, we are seeing execution risk for the first time, resulting in a continued unfavorable risk/reward due to the combination of just 10% upside in the stock and uncertainty of the transition. Firm expects these two challenges to last a few quarters and could give competitors an opportunity to attract advertisers, which could lead to more issues.
Notablecalls: I must say I would not be surprised to see BIDU stock move lower from the levels reached in after hrs trading. Not a high conviction call as some of BIDU rev guidance shortfall was due to the fact the co has began to raise prices.