Equity Valuation: Models from Leading Investment Banks

5

Standard FCFF Model

…One summer morning, the sun dawned wicked hot over Wall Street, where the watchword was Baidu.com. If Baidu meant nothing to you, oh how out of it you were. Billed as the Google of China, Baidu went public at 27, opened that day at 66 and swiftly hit 151…. Baidu, it seems, must be Mandarin for Inefficient Market Hypothesis,…¹

On August 4, 2005, the Chinese language Internet search provider Baidu.com, Inc. went public. The Chinese company founded in January 2000 helps internet search users to find information online and enables online marketing customers to bid for priority placements in search results using Baidu's auction-based pay-for-performance service. The initial public offering (IPO) was priced at USD 27. The American Depository Shares (ADS) opened at USD 66 and closed at USD 122.54 on its first trading day. USD 122.54 per ADS translated into a market capitalization of roughly USD 4.2 billion, an astonishingly high market capitalization for a company that generated only USD 13.4 million in net revenues and USD 1.3 million in operating profits in 2004.

The media dubbed Baidu as the “Google of China”. In its prospectus, Baidu reported that the research firm iResearch expected the Chinese internet user base to grow from 115 million in 2005 to 187 million in 2007.² The media hype surrounding Google and the projected growth potential of the online market in China were presumably the dominant reasons why Baidu's shares jumped almost fivefold on its first ...