Baidu Inc. (NASDAQ: BIDU) is up for earnings later this evening for us, Wednesday morning for, to report earnings.  All the media outlets sell you on “this might be the most important earnings season in years” on a misguided basis, but this is going to be one of the most important reports for Baidu.  The implications of not just the report, but the guidance, will have ripples for Google Inc. (NASDAQ: GOOG) first.  The implications will then have ripples for Microsoft Corporation (NASDAQ: MSFT) and then perhaps for the distant Yahoo! Inc.(NASDAQ: YHOO).  There are also several issues that have built inside Baidu which will require some attention.

The latest quarterly results are expected to be $1.68 EPS and $180 million in revenues according to Thomson Reuters consensus data.  That also marks year-end.  Estimates for one quarter out, our current quarter, are $1.41 EPS on $170.23 million in revenues.  We find it unlikely that Baidu will give annual projections for 2010, but those estimates are $8.92 EPS and $905.5 million just in case.

That values Baidu at almost 50-times forward earnings and almost 17-times earnings.  The big issue here all news aside is valuation and how much the company can make leaps and bounds to close the valuation gap.  Sure, Baidu has much more growth ahead in China.  But for a comparison, Google Inc. (GOOG) trades with forward 2010 multiples of 19.6-times projected earnings about 8.2-times projected revenues.  With shares close to $436.00, the 52-week trading range is $119.65 to $470.25.

Then there are the fundamental issues happening around the company which have allowed the stock to be partly immune from the major sell-off we saw last week.  Google has effectively gotten itself into what may be a no-win position in China.  That is music to Baidu’s ears.  Keep in mind that it will have no impact at all in this past quarter, but it is key to the issues for the coming quarters and coming year.  There is also the Microsoft Corp. (NASDAQ: MSFT) threat, because Microsoft has said it will not leave China regardless of what Google does.  It may leave more crumbs for Yahoo! Inc. (NASDAQ: YHOO), but Yahoo! is hard to call in the same league until it starts to recapture real market share in general.

Here is the big risk.  If Baidu says that the recent bank slowing of loans is hurting or that it has yet to get any indications that business will be much better without Google as a competitor, then we expect a serious round of profit taking.  It isn’t as if the company is valued in a manner that it will be able to promise a high dividend nor a huge buyback of stock.  This macro-economic policy change in China is a risk of course and has yet to be really addressed in-depth.  Google is said to be looking for a way to stay in China, but the damage has been done.  It is Baidu’s market for the taking if it can succeed.

There is another issue, and that is one of executive departures.  Its chief technology officer Yinan Li left last month.  Earlier last month it announced the resignation of Chief Operating Officer Dr. Peng Ye.

We are also expecting some sort of live video service update for next month, but we’d caution that Google’s YouTube hasn’t exactly been the greatest of money-makers from the start.

As far as analysts and options traders, there are many opinions here.  By our glance, it seems as though options traders are braced for a move of $18.00 or so in either direction (Google’s price is only a $10.00 to $12.00 spot pricing for comparison).  This seems hard to imagine after the market volatility we have seen in the last two weeks and considering that Baidu has held up.  The average analyst price target is only about $465 from analysts, but we have seen higher price targets than that in recent trading.  And the most recent short interest was almost 2.7 million shares.

Today is very likely to be a very pivotal quarter for Baidu.  The expectations are high, the opportunity is high, and the stakes are high.

JON C. OGG

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