If Baidu.com Inc. were a band, it would be 'Nsync. If it were a fashion item, it would be leg warmers. If it were home decor, it would be avocado green shag carpeting. Baidu, the much hyped "Chinese Google," skyrocketed 354 percent on Aug. 5, 2005, the day it went public. Now it stands as one of the embarrassing investments of the last year.
Baidu's American Depositary Receipts, which climbed as high as $153.98, now trade below $58 a share. What could be even more cringe-worthy for Baidu investors is the future: After months of decline, analysts say Baidu is still overpriced.
Baidu's history, so far, is one of hope colliding with reality. The Beijing-based company went public at $27 a share, then climbed to $122.54 its first day of trading. On Friday, the shares closed at $57.40, up 13 cents.
The shares began to slide within days, dropping below $100 within a week. After that, they swung dramatically. The stock lost a quarter of its value in one day after Goldman Sachs & Co. and Piper Jaffray, both underwriters of the company's initial public offering, issued research reports saying it was overvalued.
Despite its dramatic decline, Baidu remains "priced for perfection," Citigroup analyst Jason Brueschke said when he initiated coverage in January, months into the decline. In his next note on Baidu, he wrote, "Despite all the fundamental positives at Baidu, we still believe the company is trading above its fair value." Citigroup has a "Sell" rating on Baidu.
Anthony Noto of Goldman, Sachs & Co. said he couldn't justify the company's valuation "on an absolute basis or relative to the sector." Baidu trades at a significant premium to both U.S. large-cap Internet stocks and leading Chinese Internet stocks, he wrote. The company's estimated price-to-earnings ratio for 2006 is 84.7 percent.
Noto attributes Baidu's valuation "to exuberance over the opportunity in China as the economy booms" and excitement over Internet search companies based on Google's strong performance. The small number of publicly traded shares also "creates a disconnect between supply and demand," he said.
The challengers are lining up. Google Inc. has stepped up hiring in China. Yahoo Inc. spent $1 billion for a 40 percent stake in Alibaba.com, China's largest e-commerce site. Microsoft Corp. is investing in Chinese search and homegrown Sohu.com is building its search business.
In the face of such competition, Baidu may not be spending enough to expand its technology and offerings, wrote Piper Jaffray analyst Safa Rashtchy. Piper Jaffray ranks the stock "Underperform."
"Baidu, as the market leader, must withstand the collective impact of its competition," Citigroup's Brueschke wrote. Investors can get hurt even if Baidu maintains its market share, since the shares are likely to suffer with any kind of disappointment, from slower-than-expected growth to higher-than-expected costs.
Since analysts are so often the sunniest optimists of the investment world, it can be worth listening to them when they're at their outlook is gloomy. Consider their target prices, which are often overinflated. Target prices for Baidu are, for the most part, well below its current share price, which is one more sign that in the future, Baidu investors may be even more embarrassed about the shares' giddy IPO run-up than they are now.