The financial results for the second quarter again
exceeded the market consensus. With China's most
popular search engine, Baidu has an advantage over
rivals in China's fast-growing online advertising
market. In addition, Baidu continues to expand its
product lines to attract users and boost revenue.
Although fierce competition from Google prevents
Baidu from building a wide economic moat and Baidu's
Japan expansion will continue to negatively affect
its financial results, we think Baidu is currently
undervalued based on its growth prospects. Therefore,
we are maintaining Buy recommendation for Baidu's
stock.
The stock is currently trading at 65.5x our estimate
for fiscal year 2008 earnings per share, which is
significantly higher than the industry mean and that
of its Chinese peers. The stock is also trading at
42.2x our estimate for fiscal year 2009 earnings per
share. Using a P/E multiple of approximately 65.8x
our fiscal year 2009 earnings per share estimate
yields a target price of $450.00, which we believe
reflects the company's growth prospects.
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