4 Reasons Baidu.com, Inc. (ADR) (BIDU) Is Bottoming Out: Qihoo 360 Technology Co Ltd (QIHU), Google Inc (GOOG)

The number of investors looking to profit from Baidu.com, Inc. (ADR) (NASDAQ:BIDU) downticks is intensifying.

When Nasdaq’s bimonthly update showed that 10.6 million shares of Baidu were being sold short as of mid-February — a 52-week high in terms of pessimism — I was skeptical. “Given the growing record number of speculators betting against Baidu, it also wouldn’t be a surprise to see the stock rally as the result of a short squeeze the next time that the fallen dot-com darling has something good to say,” I concluded.

Well, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) hasn’t had anything material to say. The stock is trading a sneeze away from a fresh two-year low. Meanwhile, the worrywarts are piling up. Nasdaq’s latest short tallies are out, and Baidu closed out February with nearly 11.6 million shares sold short, a million more shorted shares than it had just two weeks earlier.

Clearly, the market isn’t too happy with Baidu as an investment these days, but let me go out on a limb and suggest a few reasons Baidu may be bottoming out right now.

1. Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has never been cheaper
You have to go back to the summer of 2010 to find the last time China’s leading search engine was trading below the mid-$80s. Baidu.com, Inc. (ADR) (NASDAQ:BIDU) earned $3.02 a year later, so its forward earnings multiple — using yesterday’s close of $87.65 to make this an even comparison — would’ve clocked in at a seemingly rich 29. However, that proved to be a bargain. The stock nearly doubled a year later.

Baidu keeps growing. It earned $4.79 a share last year. Analysts see a profit of $5.40 a share this year and $6.77 come 2014. Baidu’s forward earnings multiple today is actually less than 13.

One can argue that Baidu’s growth has decelerated, and that’s fair. However, it’s growing a lot faster than most of the other proven growth stocks with similar multiples.

2. The Qihoo 360 Technology Co Ltd (NYSE:QIHU) threat is overrated
Baidu’s shares have been weak since The Qihoo 360 Technology Co Ltd (NYSE:QIHU) introduced its own search engine this past summer.

Qihoo 360 is best known for its Web browser and suite of security software. It decided to boot Google Inc (NASDAQ:GOOG) as its default search engine, rolling out a homegrown platform that quickly ballooned to between 10% and 15% of China’s search market.

Baidu continues to command roughly two-thirds of China’s search market, serving up 5 billion search queries a day. This battle isn’t any more intense than what we see between Google and Bing in this country, but investors are still nervous.

I’m not dismissive of Qihoo 360 Technology Co Ltd (NYSE:QIHU). I’ve even suggested that investors buy both companies. However, Qihoo 360’s presence in search hasn’t warranted the sharp sell-off at Baidu.

Yes, Baidu put out a poorly received quarterly report in its first complete quarter, competing against Qihoo 360. But revenue still climbed a healthy 42%, and Baidu’s guidance for the current quarter calls for 38% to 43% in year-over-year revenue growth.

Oh, and a Beijing court is paying attention to Baidu’s claims that Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s foray into search consists of crawling and copying Baidu’s content.