Watch Out Baidu, Here Comes Qihoo!

Baidu (NASDAQ:BIDU), China’s biggest Internet search provider, has some things to prove this quarter. Its shares have gained 8 percent so far this year, but analysts have expressed concerns over the company’s upcoming earnings. When it reports fourth-quarter earnings after the stock market closes on Monday, both investors and analysts will know whether the stock’s recent increases were based on overly lofty expectations or real earnings power.

The company faces a wide lineup of concerns: competition from recent search-market entrant Qihoo 360 Technology (NYSE:QIHU), increased margin pressures associated with the company’s added focus on its mobile platform, and high capital expenditures.

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In a research note seen by Barron’s, Oppenheimer analysts Andy Yeung and Glorio Yu wrote that they believed Baidu was on track to meet or beat consensus earnings estimates. The analysts also raised their revenue and earnings targets for the fourth quarter. “While we remain cautious on BIDU in the near term as it navigates through a confluence of industry changes, the stock appears to be fairly valued, trading at an 18x 2013E P/E, relative to Google’s 17x, given BIDU’s higher growth rates and a rebound in China’s macroeconomic conditions,” they said…
Analysts at Maxim Group have a slightly different assessment. While Echo He wrote in a note that the company would likely meet its quarterly guidance, the analyst added that margins and profitability may be hurt in the future by Baidu’s attempts to boost revenue through costly acquisitions and projects. The firm also lowered its price target to $80 per share. This represents a decrease of close to $30. Shares closed at $108.61 on Friday.

Baidu is expect to post a 40 percent earnings-per-share increase this quarter, even though it has invested heavily to outcompete Qihoo, China’s second largest search provider. Qihoo only launched its search engine in August 2012, but is already a powerful force in the industry. The company has “started to monetize its search service with the support from its partner Google,” wrote T.H. Capital analyst Tian Hou in a pre-earnings research note seen by Investors Business Daily. Qihoo made a search ad deal with the technology giant earlier this year.

Even though Baidu remains the search leader in China with a 60 percent market share, Qihoo has secured a 10 percent share in its first few months of operation even if its gains have largely come from Google (NASDAQ:GOOG).

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