Is Baidu still a buy?

Is Baidu still a buy?
Think that Google’s (GOOG) stock has been on a tear lately? Maybe so, but Google’s got nothing on Baidu (BIDU), aka the Google of China.
Shares of Baidu, China’s top search engine, have surged more than 40 percent in just the past month. The stock is up about 72 percent year-to-date. But the stock took a bit of a breather on Monday after Citigroup analyst Jason Brueschke downgraded Baidu from “buy” to “hold” citing valuation concerns. The stock dipped about 2 percent in mid-afternoon trading.
Still, that’s not that big of a drop considering how much momentum the stock has had lately. And a closer inspection of the Citigroup report shows that Brueschke isn’t exactly turning into a Baidu bear.
“To be clear, we do not recommend liquidating an entire position in Baidu,” he wrote, adding that he believes Baidu will report revenues for the second quarter that are higher than Wall Street’s consensus expectations of $48.9 million, which would be an increase of 105 percent from a year ago. What’s more, Brueschke even raised his price target for Baidu to $218 a share, about 12 percent higher than the stock’s current price.
I’ve already written about how Baidu and several other Chinese Internet stocks such as Sohu (SOHU), Sina (SINA) and Shanda Interactive (SNDA) have been hot performers as of late. Baidu’s gains have dwarfed the appreciation of these stocks, though.
But that’s precisely what makes putting new money into Baidu a little bit of a scary proposition now.
Much like Google, Baidu’s growth potential appears, on the surface, to justify its performance. But as Brueschke points out, the valuation may be ahead of itself. Baidu’s triple digit P/E - the stock trades at 107 times 2007 earnings estimates - makes it an exceptionally expensive stock.
Sure, profits are expected to increase by nearly 70 percent this year and in 2008 and at about a 48 percent clip, on average, for the next five years. But the stock is a bigger gamble now since expectations for the next few quarters are so high.
After all, Baidu has surpassed earnings estimates by nearly 20 percent a quarter, on average, for the past four quarters. So the pressure is on Baidu to keep wowing the Street in order to satisfy the momentum investors that have bid up the stock to just under $200 a share in the past few weeks.
That’s exactly why Ryan Jacob, manager of the Jacob Internet fund, has been reducing his stake in Baidu recently. He still owns a small position in the stock in his fund but said he’s concerned about the valuation.
“The problem is that Baidu is such an early stage company. By far, they are the search leader in China and all indications are that they will have a very strong quarter. But we’ve cut back our position because at these prices, there’s a lot more risk,” he said.
Still, Jacob agreed with Brueschke and said investors should not completely bail on Baidu.
“Long-term, this is what’s hard. Baidu’s extremely well positioned and they’ve done an excellent job competing against Google and other local players in search. So eventually, the company will justify its valuation,” he said, but added that there’s more to China than Baidu and recommended that investors diversify their holdings in the country.As such, he also owns Sohu, Sina, Chinese travel site Ctrip (CTRP) and Tencent, a popular instant messaging company. Tencent shares aren’t as easy to purchase for the average investor, though, since they trade only in China and do not have a U.S. Nasdaq listing