Baidu Stock: Next Stop, $305?

Baidu (NASDAQ: BIDU) shares hit fresh two-year highs earlier this month, and one Wall Street pro sees the Chinese dot-com darling heading even higher. Wendy Huang at Macquarie is boosting her price target from $252 to $305, suggesting 35% of upside from Friday's close.

Huang feels that the market is not fully pricing in the recovery in Baidu's flagship search business, margin expansion as it shifts away from profit-slurping endeavors, and the long-term potential of its advantage in artificial intelligence (AI). Huang has tapped Baidu as a "Top Pick" at Macquarie.

Searching for more gains

China's leading search engine has been buoyant this year. Baidu stock has risen 37% so far in 2017. It's still another 12% away from taking out the all-time highs it hit in late 2014, but momentum is in its corner following last month's strong second-quarter results.

Baidu's resurgent top line is helping. Revenue climbed 14% in its latest quarter, and the online giant is targeting 27% to 30% growth for the current quarter -- Baidu's first period of fair year-over-year comparisons since last May's move by regulators to restrict lucrative ads on medical-related searches.

The return to headier revenue growth was expected, but the real treat is how Baidu's bottom line has been responding. Adjusted earnings nearly doubled in the second quarter. Baidu has been moving away from its once ambitious online-to-offline endeavors that were gnawing away at its profitability. It sold off its margin-squeezing online food-delivery business last week, and it won't be the last of the asset shuffles as it focuses on paid search and AI as its core strengths.

Macquarie's Huang has had a dramatic turn in sizing up Baidu this summer. She had tagged the stock with a neutral rating and a $189 price target heading into late July's quarterly report. It was an eye opener. She upgraded the stock to outperform following the financial results, lifting her price target to $252 at the time. In less than five weeks her price target has gone from $189 to $305.

Baidu shares and price targets aren't the only thing heading higher. Analysts have been scrambling to juice up their profit projections as Baidu's margin outlook continues to improve. Wall Street was bracing for earnings of $5.68 a share this year and $7.79 a share next year before last month's report. Now the income-per-share targets stand at $7.01 this year and $8.89 come 2018.

Baidu stock is hot this year, but rising estimates find the shares reasonably priced at just 25 times next year's current target. If it keeps beating expectations with earnings outpacing top-line gains, it's a safe bet that price targets and the stock itself will keep inching higher without necessarily triggering valuation concerns. Baidu investors aren't ready yet to party like it's late 2014, but someone's starting to pass out the noisemakers, champagne glasses, and confetti launchers.

10 stocks we like better than BaiduWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Baidu wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool has a disclosure policy.