Is Baidu.com, Inc. (ADR) (BIDU) a Buy at These Levels?

Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has made a recent comeback with a strong market rally. Its share price increased from more than $89 per share in the beginning of July to nearly $127.60 per share, marking an incredible gain of more than 43% within just one month. Moreover, Morgan Stanley upgraded the stock from Equal Weight to Overweight. Should we listen to Morgan Stanley’s upgrade? Is Baidu.com, Inc. (ADR) (NASDAQ:BIDU) a good buy now? Let’s dig deeper.

Second-quarter operating results

In the second quarter of 2013, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) experienced extremely high growth of 38.6% in revenue to RMB 7.6 billion ($1.2 billion). Its operating profit rose by 3.2% to RMB 2.9 billion ($473.1 million). However, its net income dropped by 4.5% to around RMB 2.6 billion ($430.8 million). The declining net income was due to the higher cost of revenue, higher SG&A and R&D expenses.

What investors might focus on in Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s operating results is its growth in mobile monetization. The company reported it had around 58,000 online active customers, and for the first time, its mobile revenue accounted for more than 10% of the total revenue.

Looking forward to the third quarter 2013, Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s revenue is expected to be in the range of $1.4 billion to $1.5 billion, representing huge growth at 39.7% to 43.3% compared to the third quarter last year. Morgan Stanley estimates that Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s operating margin will remain under pressure because of higher marketing spending. However, Morgan Stanley believes that Baidu will “enjoy operating leverage in 2014, with sales re-acceleration.”

Still the leader in the Chinese search market

Baidu has been the main beneficiary of Chinese Internet regulation, which keeps Google Inc (NASDAQ:GOOG) from operating in the country, the largest market in the world. Baidu is the leader in the Chinese search market, with the dominating 67.5% market share. Google Inc (NASDAQ:GOOG) stays in the third place with only 3.3% market share.

Actually the market shares of both Baidu and Google has dropped in the past year, due to the rise of Qihoo 360 Technology Co Ltd (NYSE:QIHU), which quickly gained nearly 15.2% of the Chinese search market share within just several months.

The quick market-share gain was due to the fact that Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s web portal and browser switched its default search engine from both Google and Baidu to its own search services, seizing many accidental users overnight. However, as there is not much Baidu traffic coming from Qihoo, and Baidu’s market share is still much larger than Qihoo, there is still a lot of potential future growth for Baidu.

Go mobile

Google is the wonderful business model for Chinese Internet companies. It is not only the leader in the search market, but also the leader in mobile, with its Android operating system. Google Android currently has around 75% of the total smartphone market and more than 56% of the tablet market globally. Google Android is also the leader in China, accounting for 90% of all mobile operating systems. However, Google Play is not available in China.