Goldman Sachs upgrades span style=”font-weight: bold;”Baidu.com (NASDAQ:BIDU)/span to Buy from Neutral and adds it to their Conviction Buy List:br /br /Baidu trades at just under 20X 2009E non-GAAP earnings:br /br /1) Paid search spending is 2bp of GDP in China, versus 9-12bp in developed search markets.br /br /2) Goldman forecasts search spending climbing at around 30% per year for several years and believes Baidu can maintain query share (with government help and consumer loyalty) for around 30% per year revenue and EPS growth.br /br /3) Baidu has $10 net cash per share, a 35% 2008 ROE, and they estimate it will convert over 80% of earnings to free cash flow. The GS Options team suggests buying 1X2 call spreads for low-cost leverage.br /span style=”font-weight: bold;”br /Catalyst/spanbr /1) They expect concern that the China government has targeted Baidu for punishment will diminish; they doubt the government seeks to disadvantage Baidu to the extent it loses substantial query share to foreign rivals.br /br /2) Firm believes paid search will outgrow China’s GDP given low penetration, rising query volumes on increasing broadband penetration, and secular demand from consumer-facing companies. (3) Baidu is trading at multiples comparable to slower-growing, more-cyclical businesses such as Alibaba.com and Ctrip, and its 2009 P/E multiple is about one-third above Google’s, while its growth rate is about double Google’s.br /br /span style=”color: rgb(255, 0, 0);”Notablecalls:/span It kind of looks like Goldman will catch a lot of short sellers with their pants down. Statistics show GSCO Conv. Buy list additions run 3-10%, depending on the nature of the stock. We know BIDU is a mover so the expected move it probably closer to 10% than to 3%.br /br /span style=”font-weight: bold;”My bet is we will see BIDU around $125-$128 level today. /spanbr /br /Goldman isn’t saying anything new but the fact they are putting the stock to their Conviction Buy list ($145 tgt) speaks for itself.

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