Baidu Finds No Room for Shortfalls

Updated from 9:52 a.m. EST

BEIJING -- Baidu.com's (BIDU) shares were slipping Wednesday after the China-based search engine disappointed investors with its soft forecast.

In a damaging after-hours admission, management said the adoption of a new bidding system may leave its growth below the norm for the next two quarters.

The stock slid as much as 9% Tuesday as investors grew jittery leading up to its results, then shed another 4% following the release of the actual quarterly report. However, when the dust settled, selling pressure abated and the stock was lower by only 1.5% at $85.94 as trading got underway.

Still, the pullback isn't a surprise in light of the stock's steep valuation. Baidu has recently traded above 50 times next year's earnings. At those lofty levels, market watchers saw little room for slip-ups.

In recent months, Baidu's stock has been bid higher because, as China's leading search engine -- a title it has managed to wrest from global giant Google (GOOG) -- it's seen as a bet on the growth of the Internet in the world's most populated nation. Already, 123 million users are said to be online in China.

On a conference call late Tuesday in New York, CEO Robin Li chalked up the weak outlook to a change made during the second quarter to Baidu's paid search algorithm, which encouraged bidders to pay more for better ad placement. The more sophisticated new system is similar to the one used by Google, allowing customers to make multiple bids to improve their placement.

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