Baidu.com (NASDAQ:BIDU): Added to Conviction Buy List at Goldman Sachs

Goldman Sachs upgrades Baidu.com (NASDAQ:BIDU) to Buy from Neutral and adds it to their Conviction Buy List:

Baidu trades at just under 20X 2009E non-GAAP earnings:

1) Paid search spending is 2bp of GDP in China, versus 9-12bp in developed search markets.

2) Goldman forecasts search spending climbing at around 30% per year for several years and believes Baidu can maintain query share (with government help and consumer loyalty) for around 30% per year revenue and EPS growth.

3) Baidu has $10 net cash per share, a 35% 2008 ROE, and they estimate it will convert over 80% of earnings to free cash flow. The GS Options team suggests buying 1X2 call spreads for low-cost leverage.

Catalyst
1) They expect concern that the China government has targeted Baidu for punishment will diminish; they doubt the government seeks to disadvantage Baidu to the extent it loses substantial query share to foreign rivals.

2) Firm believes paid search will outgrow China’s GDP given low penetration, rising query volumes on increasing broadband penetration, and secular demand from consumer-facing companies. (3) Baidu is trading at multiples comparable to slower-growing, more-cyclical businesses such as Alibaba.com and Ctrip, and its 2009 P/E multiple is about one-third above Google’s, while its growth rate is about double Google’s.

Notablecalls: It kind of looks like Goldman will catch a lot of short sellers with their pants down. Statistics show GSCO Conv. Buy list additions run 3-10%, depending on the nature of the stock. We know BIDU is a mover so the expected move it probably closer to 10% than to 3%.

My bet is we will see BIDU around $125-$128 level today.

Goldman isn't saying anything new but the fact they are putting the stock to their Conviction Buy list ($145 tgt) speaks for itself.