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Baidu Earnings Confirm Bullish Outlook

Stocks in this article: BIDU QIHU

NEW YORK ( TheStreet) -- Early in July, I posted a bullish recommendation on Baidu (BIDU), when the stock was still trading below $90 a share. Today, the stock posted new highs for the year near $130 a share, a gain of almost 45% in the period since the initial recommendation.

The surge has been propelled by the company's latest earnings report, which showed some important improvements over analyst expectations. Baidu stock has met significant selling pressure in the last few years, as its chief rival, Qihoo 360 (QIHU) has gained in market share.

But Baidu's latest earnings report shows the company's worst days are behind it and new highs are in store as we move into the second half of the year.

Baidu's revenue growth in the second quarter came in at 39% (to $1.24 billion), accompanied by upbeat guidance for the third quarter. Discouraging elements were seen in quarterly profits, which dropped by 4.5% (to $430.2 million, or $1.22 a share).

This is the first profit decline at Baidu since the company went public in 2005. But improvements in its mobile segment suggest that strengthening momentum can be expected moving forward. For the first time, mobile operations generated more than 10% of Baidu quarterly revenue -- a clear indication the company is focused on posting improved results in a previously neglected segment.

Prior criticisms of Baidu's managerial strategy have centered on weaknesses in making the transition from desktop search and in offering comparable services on mobile devices. It is much easier to generate profits in the desktop search space and, so far, Baidu has generated most of its revenue in this area of its business.

The inevitable shift in consumer preferences toward smartphones and tablets and away from PCs has been viewed as a major constraint for Baidu's performance outlook. But recent acquisitions (such as the purchase of 91 Wireless for $1.9 billion) indicate a clear intention to make heavy investments in China's rapidly growing pool of mobile consumers -- a much more sustainable strategy path for the company.

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