There are some wicked expectations riding on China"s leading search engine player and Nasdaq phenom Baidu.com. On Wednesday, after the U.S. markets closed, the Beijing-based Net concern reported that earnings nearly quadrupled to US$7.3 million and revenues vaulted 175 percent to $24 million year-on-year. Market reaction: Baidu"s share price slumped 15 percent to around $78.50 in after-hours trading on signs the company"s future growth would just be stellar -- instead of phenomenal.
Ever since the search engine debuted on Nasdaq a year ago, global investors have flocked to Baidu.com as the perfect proxy play for China"s fast-growing Net sector. The company"s shares, which were priced at $27, soared to $122.54 on the first day of trading, Aug. 5, 2005. The offering tapped into a deep investor hunger for the next Google -- and a desire to profit from the Internet in China, where some 120 million-plus people now go online. At one point last August, Baidu"s stock price hit a stratospheric $150-plus per share.
Things have calmed down since then. The stock has traded in the $70 to $90 range and the company currently has a market capitalization of about $3 billion. In recent quarters, investors have been cheered as Baidu.com generally exceeded earnings expectations; until its recent dip, it has been one of the best performing Chinese Net stocks traded on Nasdaq. Even with the 15 percent haircut in after-hours trading, Baidu"s shares are still up roughly 25 percent on the year.
Google, though, is out to change that, and Baidu will need to defend its turf aggressively. In June, Google announced plans to sell its 2.6 percent stake in Baidu, acquired before the Chinese company"s listing on Nasdaq. Both Yahoo and Google need to succeed in the second biggest market of Internet users outside the U.S., and a search market that Morgan Stanley Hong Kong-based analyst Richard Ji expects to enjoy compound annual growth rates of 50 percent over the next three years.