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Could Google Ever Approach Baidu's Valuation?

A day ahead of Google's earnings, there was this bizarre development from its Chinese rival: Baidu is now trading at over 100 times this year's earnings.

OMG.

The company should do over $900 million in revenue this year, and yet it commands a $23 billion market cap. And continues to climb. I guess with Facebook and Twitter valuations making no real sense either, Baidu's worth shouldn't be all that surprising. But it's already public, unlike those other guys, and it faces stiff competition from the likes of Google.

Unlike those other guys.

Receptionist at Baidu.com office
AP
Receptionist at Baidu.com office

But I digress: Baidu might command the market momentum, but Google's got the real mojo that matters.

It will report earnings amid a fair amount of optimism that, like Intel on Tuesday, that so many market trends are swinging Google's way.

The fundamentals of this company might be stronger today than at any other time in recent memory: Search advertising is enjoying a renaissance; and companies that discovered this inexpensive marketing strategy during the downturn seem ready now to expand their plans in a fairly dramatic way.

Google's Android operating system seems to be doing exceptionally well in the market place, seeing strong year-over-year gains and doing well against the likes of Research in Motion and Apple . There are hints that Google and Apple seem to be patching up their deep competitive differences, which will only serve both companies well as they try to divvy up the digital markets they serve.

Despite that momentum, Susquehanna says expectations seem dampened to a certain extent, likely because Q1 is always seasonally weaker than Q4. The firm says because of that, and maybe the fact that all these good-news trends aren't completely appreciated by the market just yet, "expectations are low entering this quarter, which could bode well for Google shares if it executes even a slightly better than expected result."

The Street is looking for non-GAAP earnings per share of $6.56 on $4.93 billion in revenue, along with non-GAAP operating income of $2.7 billion.

Citi's Mark Mahaney anticipates a very good quarter indeed from Google. The company realized 16 percent year-over-year growth in Q4, he says, and should see 25 percent year-over-year growth in Q1. Pro forma operating margin should be up 54.2 percent, a nice year-over-year increase, but down sequentially from the 55.7 percent Google saw in Q4.

I always like to highlight Mahaney's useful cheat sheet, so here goes:

He's above the Street, at $6.71 a share on $5.07 billion. The Street's looking for 54.8 percent in operating margins, though Mahaney suggests that anything lower than 54.5 percent could be perceived negatively; above 55.2 percent and that would be positive.

Paid Click growth should be up about 12 percent year over year; Web Sites Gross Revenue should be around $4.51 billion, though anything less than $4.29 billion would be bad; Network Sites Gross Revenue should be around $2.06 billion, says Mahaney, though less than $1.98 billion could be a problem; Sequential North American Revenue should be down about 1 percent, but a decline of more than 3 percent might be viewed negatively; Sequential International Revenue growth should increase by 6 percent, but growth of under 2 percent could be bad. And Capex spending should be around $341 million.

This is a closely watched metric given Google's historic spending tendencies. Mahaney says a number north of $500 million would be an issue.

All of these numbers run financial circles around Baidu, which most certainly has the inside track to the enormous Chinese market. But since no one really understands just how big — or potentially profitable — that market might actually be one day, Baidu's nosebleed valuation continues to defy gravity and reason. Didn't we go through eyeball valuations before? And yet everyone seems to be increasing targets. Earlier this week SIG took its target from $540 to $720.

Huh?!

Google is enormously profitable and it's trading at something like an 80 percent valuation discount to Baidu.

Again, huh?!

I don't deny there are serious competitive and regulatory threats to Google still looming: If you read through the documents connected to its $1 billion lawsuit involving Youtube and Viacom , you'll see that Google faces some big exposure there.

There's every indication that its AdMob acquisition plan will face Federal scrutiny and that might delay its mobile advertising strategy and give Apple a leg up in that all important battlefront of the future; Bing from Microsoft continues to chip away slowly at Search market share. Same goes for Yahoo . On a much smaller scale, Google is having ongoing trouble in China, which on a Search basis may not be material, but if those issues extend to Android and mobile in that country, that could become far more meaningful.

To date, however, Google has been able to beat back all competition and all threats, and it has done so rather effectively.

I don't see anything today that would suggest otherwise for this company. Trends are moving in Google direction, this company continues to execute, and competitors are still trying to come up with a meaningful offensive. This was a $626 stock in January. Short of some unforeseen surprise with earnings on Thursday, this company seems primed for a rockin' 2010 and its march should begin with this week's earnings report.

Questions? Comments? TechCheck@cnbc.com