Analysts: Goldman's $310 target

Goldman reiterated this sometime ago. In
the light of new data, GDP figures and
Yuan appreciation, let us check the
model out again. Here is Goldman's
original analysis:

In a scenario where China’s economy in
2013 is half the size of the US economy
today (as our economists forecast), and
where Baidu’s market cap in 2013 is half
as large as Google’s US-attributable
market cap today, we estimate that
owning Baidu stock for five years will
generate an attractive IRR of about 25%
per year. However, we believe structural
differences between developed world and
China search environments could reduce
this IRR to a mid-teens rate, given the
presence of Google as a cash-rich rival,
the existence of low cost-to-seller
marketplaces in China, and the dependence
on salespeople to drive search customer
additions.

In 2007, China's GDP was at 3.43 trillion, and
US GDP at 13.485 trillion (2.2% rise from 06).
Assuming an average GDP growth rate of
10%, and an average Yuan rise of 10%,
China's GDP will be 1/2 that of today's US
GDP in 3.55 years. This comes from
log(13.485/2/3.43) / log(1.10 * 1.10)

Google's current market cap is around
$160 billion, with half of its revenue from
the US. Its US-related market cap is $80
billion, and for an economy half that size,
that translates to $40 billion.

Per this model, Baidu should be a $40
billion company in 3.55 years. So what
should be its value today?

That calculation depends on what rate
of return you can get on other
investments. For a AAA rated bond,
let us assume a rate of 4%, and for a
junk bond, a rate of 9%.

If you believe Baidu's growth story for
the next 4 years is as credible as a AAA
rated bond, then its current market
cap should be $33.64 billion.
(40 b / 1.04-raised-to-3.55)

If you believe Baidu's growth story for
the next 4 years is as credible as a
junk-rated bond, then its current market
cap should be $29.45 billion.
(40 b / 1.09-raised-to-3.55).

Interestingly enough, Goldman based
its final target price not on the model
they describe, but on a traditional
P/E metric, comparing a startup,
Baidu, to an established company,
Google.

The main risk in the model is
assuming search ads as a share of
the total economy will be about the
same for the US and China. One
could argue Internet penetration
is much lower in China and so
search ads have less reach. On the
other hand, one could argue Internet
penetration is significantly higher in
regions contributing most to the
GDP, and so online ads have a
significant influence on the meatiest
part of the economy.