Is Susquehanna’s Call on Baidu Overly Optimistic?

In the Hutong
Writing is Freedom
2100 hrs.

Susquehanna Financial made a bold call last week on Baidu’s share price, targeting $1,000 per share for Baidu. Ignore for a moment that SFC actively seeks to do business with the companies it covers, thus tainting the analysts’ independence. Instead, let us ask whether Susquehanna is underplaying the risks, which they think are primarily:

1) Customer growth slower than expected; 2) Market overly pricing in impact from Google’s departure; 3) Monetization up to high causing lower ROI for advertisers and hence losing customers to competitors; 4) Emerging competitors Tencent, Taobao, and, among other domestic search engines; 5) A hard landing in the Chinese economy.

Had SFC taken the time to elaborate on each of these and explain exactly why they were risks, I am not certain the company could have justified its target quite so persuasively to its readers.

What is more, there are significant risks that SFC failed to enumerate, including:

6. Advertiser abandonment of search in favor of other means of digital advertising;

7. User backlash against Baidu for mixing paid results with natural search, and for blocking results of the competitors of its advertisers;

8. Creative recovery by Google from Hong Kong that allows Google to continue narrowing the gap with Baidu on the mainland;

9. Continued failure of the company to stabilize its leadership team, hampering its progress in addressing the significant challenges in its core business.

10. Fragmentation of management attention and engineering resources caused by pursuing too many divergent opportunities at once.

All of which is to say that the risks Baidu and its investors face deserve more attention than they are getting, certainly from the investors, and possibly from management as well.

(Full disclosure: I own 5 shares of Google common.)

Posted via web from Silicon Hutong on Posterous


About David Wolf

An adviser to corporations and organizations on strategy, communications, and public affairs, David Wolf has been working and living in Beijing since 1995, and now divides his time between China and California. He also serves as a policy and industry analyst focused on innovative and creative industries, a futurist, and an amateur historian.
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