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Baidu Falls From Lofty Heights

By Keith Regan
Sep 15, 2005 10:29 AM PT

Baidu.com, the search company billed as the Chinese version of Google, saw its stock price take a huge hit this week after two major investment banks that helped underwrite its August initial public offering cautioned that recent share price run-ups were not supported by fundamentals.

Baidu Falls From Lofty Heights

Both Piper Jaffray and Goldman Sachs downgraded the stock yesterday, helping to send shares lower by more than 27 percent and make it the largest percentage loser on the Nasdaq exchange. The two firms helped take Baidu's Aug. 5 IPO to market, along with Credit Suisse First Boston, which does not have an analyst covering the stock.

Investor Roller Coaster

Baidu shares rose more than 400 percent on their first day of trading, making it the best Internet debut in five years, and continued to climb slowly afterward. Even after the plunge yesterday, the shares trade at more than three times their debut price of US$27, reporting early today at $84.55.

The bankers continue to believe in the Baidu business model and story and downplay the impact of competition from Google and others that have made aggressive plays to take a stake in the Chinese market, saying those outsider may well gain a foothold but will not overcome Baidu in the short-term.

Piper Jaffray analyst Safa Rashtchy said his under-perform rating and outlook of $45 on the stock was based solely on over-valuation.

"Baidu's current stock price has far exceeded even the most aggressive valuations and is distinctly 'off the chart' in our view," he said. "The meteoric rise of Baidu's stock after its IPO has given the company valuation multiples far above both the large Chinese Internet names as well as the premier U.S. Internet companies."

The firms said the stock was trading at more than 120 times projected 2006 after-tax earnings, a valuation rate that far exceeds that of any other Internet stock.

Goldman Sachs analyst Anthony Noto said the stock is probably worth right around the $27 IPO price based on its current performance rates.

Still Bullish

Long-term, the analysts say Baidu remains poised for growth amid a booming Chinese Internet economy.

"Search queries are growing at a very rapid rate, expected to double in 2005 and continue to grow fast, as increasing relevancy and higher user familiarity with search engines creates more usage," said Rashtchy.

Noto said earnings will double in 2006 as revenue climbs by 71 percent, with revenue expanding by some 25 percent through 2009.

"By 2008, the number of Internet users in China should reach 252 million, surpassing that of the U.S.," he said in a research note. That will still only represent 19 percent of the total population, leaving huge room for additional growth long-term. "These strong secular growth trends provide a positive backdrop for Baidu."

Analysts say the run-up was not surprising giving the hype that accompanied the IPO and the opportunity that it represented to own a slice of the future of the Chinese Internet. Investors who missed out on Google's debut, only to see the stock climb and stick around the $300 level may have been especially eager to buy Baidu's U.S.-listed shares.

"The float was relatively small, so the demand drove up the price quickly," said Ipohome.com analyst Paul Bard. "There was pent-up demand and the interest probably outweighed the near-term performance."

Google Pressure?

Some observers cheered the downgrades as a sign that new systems put in place to better divide banking houses' underwriting operations from their stock-analysis department were working. In the past, it was rare for major banks to issue unfavorable or sell ratings on companies that provided underwriting income.

A handful of major Wall Street firms paid into a $1.4 billion settlement of charges that they continued to hype their client stocks even after the dot-com worm turned, helping to create the Nasdaq bubble that burst more than five years ago.

Meanwhile, interest in China remains strong, with Yahoo buying a stake in Alibaba.com to get a foothold there and some speculating that Google's $4 billion secondary stock offering slated to launch this week could provide the cash to make further moves in that market. Google also recently announced that it had signed three ad re-sellers in China to market its paid listings there.


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