Top Chinese search engine Baidu Inc. could see its sales rise by more than half this year if Google's high-profile battle with Beijing escalates, but investors appear to have priced in much of the upside.
Analysts expect Baidu, whose name comes from an ancient poem about the quest for perfection, to win as much as half of Google China's search revenue after it shut down its google.cn site and migrated users to its Hong Kong site this week.
That could add as much as $330 million annually to Baidu's top line, representing a more than 50 percent increase on 2009 revenue of 4.45 billion yuan ($645 million).
But with the stock trading up some 54 percent since Google first threw down the gauntlet in January, it now trades at a rich forward 2010 price earnings ratio of 61 times, nearly triple that of Google.
That leaves the company little room for error or disappointment.
"The valuations are getting very high and people are pricing in that the Chinese government is going to shutdown Google.com and Google.com.hk," said Eric Wen, head of Internet research at Mirae Asset.
Baidu closed at $594.88 on Tuesday, above the median price target of $567.56 from 23 analysts polled by Thomson Reuters I/B/E/S.
While analysts have been revising up earnings estimates, StarMine ranks Baidu among the lowest decile for value on both relative and intrinsic measures.
Some analysts also worry that Baidu's domestic focus could also limit its growth.
The company may pour some $30 million into Japan this year, one of its few offshore markets, where it operates a loss-making search site that competes against local giants such as Yahoo Japan, JPMorgan analyst Dick Wei said in a research note.
Despite some valuation concerns, Baidu's growth prospects in the world's largest Internet market have made it a favourite among investors.
At the end of 2009, Baidu held more than 60 percent of China's $1 billion search market, while Google had 30 percent. China's search market is expected to grow by 40 percent in 2010 reaching 10 billion yuan, according to Beijing-based research firm Analysys International.
Founded and led by Robin Li, a computer science engineer by training whose own pursuit of perfection has made him one of China's richest men, Baidu could start nibbling away at Google's China revenues almost immediately, said Citigroup analyst Catherine Leung.
"Even without Google there is a lot to look forward to for the company, so the premium valuation reflects the long term market opportunity," she said.
Most observers believe advertisers won't abandon Google right away, but will wait to see first how much of Google's China search traffic goes to its uncensored Hong Kong site where queries are now being redirected.
Google shut its Chinese search Website on Monday, two months after threatening to leave China's search market over a hacking incident and self-censorship rules imposed by Beijing.
Baidu's senior executives have stayed largely quiet on the subject, basking instead in the near non-stop media comparisons with Google, whose market share in China is about half that of its own.
Li appeared to make a rare low-key reference to the subject after Google's Monday announcement, asking Baidu users on a company site if his company should enter the Hong Kong market.
Google's withdrawal aside, Baidu's current search dominance should also get a boost from its recent switch to a new keyword advertising system that better monetizes search terms.
Baidu is also aiming to broaden its base into other areas such as e-commerce through its own initiatives and in partnership with others, as exemplified by its recent online retail joint venture with Japan's Rakuten.
China's nascent e-commerce industry is expected to reach 713 billion yuan ($104.4 billion) alone in 2012.
Earlier this year, Baidu also set up of a joint venture company to provide premium legal online videos.