Shares of Chinese search giant Baidu (BIDU: Charts, News, Offers) slid nearly 10% in the past two days of trading after China’s CCTV (the state-controlled China Central Television) network accused the company of being lax in its oversight of advertisers. The company survived similar, more severe accusations in 2008 and 2010, but this didn’t deter short sellers from driving the stock price down quickly and bombarding message boards with fear-mongering comments. CCTV has claimed that Baidu allowed fake pharmaceutical companies and travel agents to purchase ads on its website, and that Baidu employees aided these fraudulent companies in the cover-up.
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A particular damning report showed a Baidu employee helping an undercover reporter, posing as the manager of a fake weight-loss drugs company, circumvent checks on pharmaceutical advertisers by registering the company as a machinery company and changing the keywords later so the fake pharmaceutical company would appear to be legitimate. However, the report’s legitimacy has been hotly debated. CCTV reporters also claimed that the company’s bidding system for keywords drives up the cost per advertisement unfairly, and is prone to market manipulation by both Baidu and its customers. Although the report was widely negative, the sell-off in the company’s stock, which survived the past volatile week with incredible relative strength, appears unwarranted and the result of panic selling and short sellers.
Baidu has been attacked for its lack of oversight on music and software piracy in the past, but quickly bounced back. The company faced off with CCTV three years ago over the same accusations, and although the stock fell 40% over the next 40 days, it quickly bounced back as the company’s financial strength outweighed media-driven fears. It’s also worth noting that the stock was only trading in the $20s at the time. In July 2010, CCTV attempted to slander Baidu again, this time with far less effective results. In fact, Baidu started 2010 at approximately $40 and ended the year nearing $100.
There’s no reason investors need to be concerned with the accusations – after all, CCTV is a news channel, not a formal government regulatory arm. Deutsche Bank (DB: Charts, News, Offers)analysts – who remain bullish on Baidu – stated in the company’s defense, “We believe the CCTV report is not motivated by the government. We believe Baidu has established a strong relationship with a broad range of government bodies, which is evidenced by six ministry-level government bodies joining hands with Baidu in Sunshine Action, an initiative to clean-up fraudulent advertising.” More encouragingly, Deutsche maintained its “buy” rating on Baidu and $190 price target, and added, “We expect the exposure by CCTV to have little impact on Baidu’s operations and financials.”
Piper Jaffray’s Gene Munster also came to Baidu’s defense, calling the charges “old news,” that the company’s business is “unlikely to be meaningfully impacted,” and that Baidu “continually polices its system for fake advertisers.” Munster also compared Baidu’s growth curve with Google’s (GOOG: Charts, News, Offers) at a similar point in the search giant’s history, and sees “double-digit” revenue growth continuing into 2014, increasing 350% over the next three years. Munster claims that in fiscal 2011, Baidu will earn $2.94 per share on revenue of $2.17 billion, and $4.53 per share on revenue of $3.6 billion in fiscal 2012. This is a more optimistic forecast than the Street consensus for $2.90 per share on revenue of $2.14 billion in 2011, and $4.37 per share on revenue of $3.28 billion in 2012.
JPMorgan (JPM: Charts, News, Offers) analysts were slightly more cautious, warning that sales in the short-term may be impacted, while Standard & Poor’s cut its rating from “Strong Buy” to “Buy” while maintaining its price target of $200. S&P analyst Scott Kessler stated, “We now see increased risk to BIDU, especially given significant optimism from analysts.”
Looking forward, Baidu has a bright future in China. After Google’s petulant exit in 2010, the company has gained 87% of the company’s search queries. Google’s enemies have also lined up to ally themselves with the search giant. Microsoft announced a Baidu-Bing partnership in which Microsoft would provide English search results to Baidu users, which suggests that an alliance with Microsoft’s ally Nokia might not be far behind. Facebook’s Mark Zuckerberg has also met with Baidu CEO Robin Li to discuss a Baidu-Facebook partnership to help the social network return to China. Baidu also has its sights set on the Arabic-speaking world, where Internet usage is rapidly increasing and Google has a limited presence. Long-term investors should use this media-driven dip in Baidu shares as a golden opportunity to load up on shares for the long run. This stock still has years, if not decades, of solid growth ahead.
Other News About BIDU
Baidu Drops 6% As State Media Attacks; Piper Defends
Baidu gets hit hard by CCTV but analysts remain bullish.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
this time, it looks like the government is behind CCTV, and Baidu is facing new challenges totally differnt from previous ones. Games rules will be changed for Baidu in China for sure this time. Therefore, investors should be highly alert and not speculate anything based on past events. it’s much safer to SELL BIDU now before it slides into trashes.