BUY OR SELL - Baidu's lofty price: a deal, or time to bail?

* Valuations at pre-financial crisis highs, time to sell

* 40-50 percent annualised growth, still a bargain

* Can still maintain supremacy over Google

(For other Reuters Buy or Sell items, click [BUYSELL/])

By Kirby Chien

BEIJING, July 30 (Reuters) - Baidu Inc. (BIDU.O) is undoubtedly benefitting from its perch atop China's fast growing Internet search market, ratcheting up an eye-popping 169 percent gain in its share price since the beginning of the year.

And as China's Internet search market expands into third- and fourth-tier cities, Baidu is well positioned to gain the most from.

While nobody questions stellar growth in coming years some say its time for Baidu to take a breather as the good news is already factored in the shares and competitive pressures weigh.

GLASS HALF FULL

China's search market grew 47 percent in the second quarter to $2.6 billion from a year earlier, according to Analysys International, helping push Baidu's shares to close at $344.5 on Wednesday, and its price earnings (PE) ratio to a heady 59 times estimated 2009 earnings.

That PE ratio is more than double rival Google Inc's (GOOG.O) pedestrian 23.5 times, but still a bargain compared with the 138 multiple Baidu was trading at in 2007. J.P. Morgan's Dick Wei thinks the share price has the legs to hit $390 this year.

Many analysts say Baidu's strong earnings potential underpins its primary market position. [ID:nN22337945]

"In China, the growth model is different," said Wei. "Baidu revenue could grow 40-50 percent annually in the next couple of years."

"Baidu has a significant lead in market share, there is only 25 percent penetration and people know the brand," said Wei. "The share price still has room to rise."

Wei says Baidu is one of J.P. Morgan's top picks in the sector and recommends an overweight for the stock.

Not only did Baidu add customers at a 10 percent clip in the second quarter, the growth in average revenue per user -- a key earnings' driver -- was up a surprisingly strong 23 percent over the previous quarter, according to Susquehanna International Group.

GLASS HALF EMPTY

Global investors have been hungry for a good growth story, however, and while Baidu fits the bill, the buying has been overdone, say others.

"It is trading at a premium to pre-financial crisis valuations," said Jin Yoon, an analyst at Nomura International based in Hong Kong.

"Where does the stock go from here? Its overheated", it's a case of liking the company but not the stock, said Yoon.

"The company is still highly correlated to the broader economy, which is not out of the woods yet," said Yoon, who has a target price of $311.3 for Baidu and changed his recommendation to "reduce" from "neutral".

Along with Baidu's fast growth are rising costs associated with marketing and Phoenix Nest -- a new advertising system that displays paid links and keywords similar to Google.

Baidu controlled 61.6 percent of China's search market in the second quarter, according to Analysys International, more than doubling Google's 29 percent.

Credit Suisse says Baidu is expensive and has a target price of $248, implying a PE ratio of 39 times forecast 2009 earnings.

Credit Suisse reckons traffic acquisition cost (TAC) -- a key barometer of profit margins -- as a percent of total gross revenue rose 16.0 percent in second quarter, from 12.7 percent a year earlier, and could hit 17.3 percent in 2010. ($=6.83 yuan) (Reporting by Kirby Chien; Editing by Valerie Lee)