Chinese search engine, Baidu crushed estimates again and its stock is trading at new all-time highs near $220 this morning.
BIDU IPO-ed in 2005 at $27 per share, which is 2.70 on a split-adjusted basis. They had a 10:1 split in 2010. It was considered the hottest IPO of the year. $BIDU gained 350% on its first trading day, finishing at $112.5 (12.25 split-adjusted).
Over the past decade, BIDU never looked cheap. It was trading at a high P/E multiple all-the way from 2.70 to 220. Don’t be afraid to pay up for high-growth stocks with great potential. In many cases, they are expensive for a reason. Over time, earnings could more than catch up with people’s expectations and justify high valuations.
This is exactly what happened with Baidu. In the quarter before its IPO, it earned $8 million. In its latest 2014 quarter, Baidu earned $571 million.
The market is a voting machine in the short-term and a weighing machine in the long-term. Valuation matters in the end only if earnings don’t catch up, you plan to hold forever and you don’t have an exit strategy. If price gets you in a trade or investment, price should get you out. If you don’t know why you are in the trade, you won’t know when to exit.
