Why This Analyst Upgraded Baidu Shares To Buy

In a report published Monday, T.H. Capital analyst Tian X. Hou upgraded shares of Baidu Inc (ADR) (NASDAQ: BIDU) to Buy from Hold with a $239 price target as the company can now execute on a new strategy after all the negatives aspects of its business are all fully understood.

According to Hou, Baidu's search business now has "significant" potential to resume high growth driven by new mobile initiatives including its distance proximity bidding that allows businesses to conduct search marketing in a locally defined territory. The analyst said that Baidu has the potential to capture customers' needs for location based services and to become a "new engine" for the company's future growth.

"Mobile has its unique features compared to the PC, and it is more personal," Hou wrote. "As such, mobile is equipped for personalized and regionalized marketing or commerce. We believe Baidu's distance proximity bidding (DPB) offering can be one of such products that utilizes these unique features and suits millions of small regional businesses' marketing need of advertising in a defined area locally."

Hou also noted that Baidu's upside potential to current earnings expectations can be "meaningful" as potential customers for the new service are different from its current customers that fall under nationwide advertising. The company had about 524,000 active customers in the first quarter while there are 70 million small businesses in China that can benefit from DPB which is the "right product" to address the large market.

A $239 price target is based on a 22x PE multiple to the analyst's 2016 non-GAAP earnings per share estimate of $10.87.