According to research firm iResearch, Baidu held 63% of the Chinese search market share compared to Google's (GOOG) 26%, based on the number of uses in the second quarter of 2008. Furthermore, Baidu has thousands of content partners, constituting the market's largest advertising network in China.

The financial results for the second quarter again exceeded the market consensus. With China's most popular search engine, Baidu has an advantage over rivals in China's fast-growing online advertising market. In addition, Baidu continues to expand its product lines to attract users and boost revenue.

Although fierce competition from Google prevents Baidu from building a wide economic moat and Baidu's Japan expansion will continue to negatively affect its financial results, we think Baidu is currently undervalued based on its growth prospects. Therefore, we are maintaining Buy recommendation for Baidu's stock.

The stock is currently trading at 65.5x our estimate for fiscal year 2008 earnings per share, which is significantly higher than the industry mean and that of its Chinese peers. The stock is also trading at 42.2x our estimate for fiscal year 2009 earnings per share. Using a P/E multiple of approximately 65.8x our fiscal year 2009 earnings per share estimate yields a target price of $450.00, which we believe reflects the company's growth prospects.