Schultz: Know When to Buy Baidu

Baidu (BIDU Quote - Cramer on BIDU - Stock Picks) fever is back.

The leading Chinese-language search provider reported a top-notch quarter last night, adding to its market share lead in China, the holy grail of search markets. The Chinese Internet darling reaffirmed its pole position status over global powerhouse Google (GOOG Quote - Cramer on GOOG - Stock Picks) commanding nearly two-thirds market share.

The company reported second-quarter earnings of $1.11 a share, which exceeded consensus by 13 cents. Also, revenue surpassed previous company guidance with a 124% year-over-year rise to $117 million ($112.5 million consensus).

In my opinion, the standout figure in the latest quarter was the robust margin expansion. Both gross and operating margins grew significantly, demonstrating the strength and power of the Baidu business model. Compared with the same period last year, operating margins grew to 38.1% from 34.4% and gross margins rose to 65.1% from 63.5%.

Led by CEO Robin Li, Baidu was able to add to its top position in the world's largest Internet market by expanding its product offerings. In addition to search, the company has scaled up and now offers products such as Baidu TV, games from Shanda Interactive (SNDA Quote - Cramer on SNDA - Stock Picks) and Hao123, an index of the most popular Chinese Web sites.

Factoring in the one-time event of the Olympics, management smartly issued conservative in-line guidance for next quarter, forecasting third-quarter revenue of $132 million to $136 million. I believe the company is adjusting for the temporary change in user behavior during the Beijing games. Analysts note that paid search activity is expected to soften as all eyes and activity focus on the Olympics.

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