Last week was a great week for Chinese Internet stocks.

Oh, not for their share prices. Last week was grim on that front.

Baidu (BIDU), the operator of China’s most popular search engine, was down 7.1% for the week. And that’s about as good as it got in the sector. Sohu.com (SOHU) which runs an Internet portal, fell 11.3% for the week. Sina (SINA), an operator of online content sites, dropped 14.6% for the week. Renren (RENN), the hot recent initial public offering (IPO) for the Facebook of China, plunged 21.7% in the week.

But for investors hoping to figure out if there is a fundamental case for investing in this sector—and in specific stocks–it was a super week. The Chinese Internet stocks that plunged, plunged on fundamentals that we know and understand from the history of the U.S. companies in the sector. (Although valuations for U.S. Internet companies don’t always reflect these fundamentals.) The drop, painful as it was demonstrated that China’s Internet stocks aren’t just playthings of momentum where nothing counts but the enthusiasm of the moment.

Last week’s drop said that Chinese Internet stocks obey—albeit with even more volatility that their already volatile U.S. counterparts—the fundamental rules that govern Internet stocks in the United States and other financial markets. After the plunge I think you could feel a whole lot more confident about investing in the sector—and not just because the stocks had become 10% cheaper.

The key event of the week was the May 11 announcement from Sina, owner of China’s third-most visited website and the Weibo social messaging service, that it had missed first-quarter earnings estimates. Earnings fell by 39% from the first quarter of 2010 to $15 million. That was below the $15.4 million consensus among analysts who follow the stock. The shortfall was due, the company said, to increased spending on the Weibo service. Total investment in Weibo, which claims 140 million users, may reach $100 million.

So what’s the big deal about Sina’s quarter? Read more

How much are you willing to pay now for a great long-term growth story? And how much volatility can you stand?

Those are the current questions for owners of shares of Baidu (BIDU), China’s leading search engine.

The stock has been on a tear since December, climbing to $143 on April 4 (it traded at $142.90 on April 11 as I posted this) from $97 a share on December 31. That’s a gain, as of today, of 47% in a little over three months. And the intraday high at $143.48 marked a new high for the stock.

The shares now trade at about 90 times trailing 12-month earnings per share and at 55 times the projected analyst consensus 2011 earnings per share.

Pricey? Well, the shares aren’t as expensive as they seem considering Wall Street projections for the company’s earnings growth. The median estimate from the 25 analysts that follow the stock calls for 45% earnings growth in 2012.

You should never stop with a consensus estimate, however, especially with an ultra-fast growth stock like Baidu. The consensus hides a huge difference of opinion. The most optimistic analyst is looking for 71% earnings growth in 2012. The most pessimistic just 25%.

Quite a difference.

No one thinks that China’s market for Internet search is about to top out. And no one sees a rival about to seriously challenge Baidu’s dominant market share: the company has 70% of the paid search market and an even bigger share of the search query market.

But the big question for Baidu is how quickly it can capitalize on that huge market share. Read more

Buy Baidu (BIDU)

Doing some catch up on this stock. I added Baidu (BIDU) to the Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on January 18, but this is the first time I’ve had an opportunity to explain why in detail or to actually add it to the portfolio. I’m working on explaining the other sells and buys announced on January 18 from that group over the next week or so.

Great quarter for Baidu (BIDU) and I certainly like the way the operator of China’s most popular search engine has made hay from Google’s (GOOG) problems in China. Looking forward I think growth will continue at the current torrid pace but margins are likely to fall as Baidu expands into new markets and as competitors try to take market share in search.

For the fourth quarter, announced on January 31, Baidu reported that sales increased by 94% (to 2.45 billion Yuan or $372 million) from the fourth quarter of 2009. Net income more than doubled to 1.16 billion Yuan ($176 million) from 428 million Yuan in the fourth quarter of 2009.

For the first quarter of 2011 Baidu projected that revenue will range from 2.38 billion to 2.45 billion. That would be essentially flat with fourth quarter revenue. But the forecast is an increase from the 2.3 billion Yuan consensus among the analysts who follow the company and year-to-year growth would climb to 84.5% from the first quarter of 2010. That would be enough to keep the company’s record of accelerating growth intact since year-to-year growth in the first quarter of 2010 was just 59.6% from the first quarter of 2009.

Baidu’s market share in search grew to 75.5% from 73% in the third quarter of 2010. Read more

Google’s China troubles not so great for Baidu?

Troubles at Baidu (BIDU)?

Traders jumped into shares of  Baidu last week on the theory that Google’s (GOOG) troubles in China—and the likely shutdown of the company’s Chinese search engine—would be good news for the biggest domestic search company.

Today they seem to be having second thoughts. Baidu shares were down almost 8%–$36.68 a share—at 11:15 in New York. Read more