Wall Street analysts on Tuesday cut their price targets on Baidu Inc, after China's dominant search engine forecast a sequential decline in fourth-quarter revenue due to the transition to a new Internet
Shares of the company fell percent as much as 20 percent in pre-market trade Tuesday, after Baidu surprised investors when it revealed transition to its new Phoenix Nest system will lead to softer revenues into next year as customers adjust.
This marks a rare stumble for Baidu, whose name is practically synonymous with Internet search in China, and opens a window of opportunity for others salivating for a piece of the country's fast-growing online market.
With only 36 days to move about 80 percent of revenue to the new bidding system and customer-to-sales ratio of only around 60:1, we believe earnings volatility in the fourth quarter of 2009/first quarter of 2010 could be high, analysts at J.P.Morgan Securities wrote in a note to clients.
On the other hand, a shorter transition time will likely gather stronger momentum, creating a sense of urgency for customers to switch, JP Morgan analysts said.
Baidu's Phoenix Nest technology, introduced in April, is an overhaul of the company's keyword advertising bidding system and is expected to improve Baidu's monetization of its search results.
The Phoenix Nest bidding system is a more advanced system and is likely to bring higher return on investments to customers and revenue to Baidu, JP Morgan analysts said.
The company's growth is expected to accelerate in the second quarter of next year, around six months after the full transition to the Phoenix Nest bidding system, they added, and urged investors to add Baidu shares on weakness for long-term benefits of Phoenix Nest. Separately, Goldman Sachs analysts said Baidu's decision to discontinue the old bidding system by Dec. 1 is strategically justifiable, as running two bidding systems in parallel is logistically complex, confusing for advertisers, and weakens the bidding process.
Still, Goldman analysts expressed disappointment as management did not communicate the risks around a faster transition to investors sooner. Shares of Baidu, which closed at $432.97 Monday on Nasdaq, were trading at $347.63 in pre-market trade Tuesday.
The table below lists the price target changes on Baidu:
Brokerages Price Target ($) Rating
Current Prior Bernstein 420 460 Outperform Goldman Sachs 435 455 Buy JP Morgan 460 480 Overweight Susquehanna 450 380 Positive
(Reporting by Tenzin Pema in Bangalore; Editing by Anil)