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Baidu May Not Be a Bargain Yet

Behold the Baidu (BIDU - Get Report) backlash. And it couldn't have come at a worse time.

Backlashes happen. The bigger the spotlight, the stronger the backlash. eBay (EBAY - Get Report) felt it when sellers arranged boycotts to protest new policies. Google (GOOG - Get Report) got it bad when its "don't be evil" mantra was flung back in its face.

They both toughed it out, albeit with a few bruises and scratches. The Baidu backlash looks much worse. The stock rose 15-fold from its 2005 IPO price of $27, hitting $429 a year ago. Now it's back down, hanging just above the $100 mark. The company is facing a series of setbacks and lawsuits just as the global recession is threatening its ad revenue.

Investors who are looking for bargains to emerge in Asia before they do here might be tempted by Baidu's beaten-down stock price. They should think again.

The latest blow to Baidu came Friday, when Goldman Sachs (which has an investment banking relationship with Baidu) issued a note that drove Baidu's stock down 5% to $109.10 Friday. Goldman analyst James Mitchell fretted that not only are some advertisers bidding less, but consumers may start clicking less on sponsored links. Following a short-lived rally Monday, the stock was down again Tuesday, dropping 7.3% to $109.36.

"Baidu's revenue may be more performance-driven than other China media but less performance-driven than search engines elsewhere because many of its advertisers use search to support brands rather than drive online transactions," Mitchell said.

That's a crucial distinction because advertisers strongly prefer performance-based targeted ads over brand-building ads, like Yahoo!'s (YHOO - Get Report) banner ads. Baidu may be falling behind Google's algorithms in terms of uniting searchers with the links that could result in a transaction.

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