Baidu vs. Google: Which Is the Better Stock?
by: The Balanced Bull February 15, 2011 |
In a recent article, I pitted Google vs. Apple in a showdown of stock heavyweights with Apple (AAPL) coming out as the winner. Now Google (GOOG) faces off against Chinese rival Baidu (BIDU) to see which search company is the better investment going forward.
Baidu has been on a tear for the past few years, rising from a (split adjusted) price of $12 in early 2009 to its current price of around $128. Meanwhile, Google has had a nice move from around $300 a share in early 2009 to its current price of about $628. The stock remains well below the all-time high of $714 reached in late 2008.
Google Is Growing (Old?)
Google is the clear leader in search with about an 85% share of the global search market, as of February 2011. This dominant position makes Google a financial juggernaut, one that generates more than enough cash to feed its voracious appetite for start-ups and new hires. The questions now are: How much more room is there for Google to grow? And, how will the brain-drain to Facebook and others affect the company going forward?
In the fall of 2010, the release of "Google Instant" provided a one time jump in searches but that effect is now over and priced into shares. Meanwhile the competition from Bing/Yahoo is increasing and Baidu is expanding its ambitions abroad. Google is now left to defend market share against a host of able competitors while searching for growth outside of its core search business.
Luckily the California based company has been working for years to become much more than just a search engine. The Android mobile operating system is growing rapidly and is now the most widely used smartphone OS in the world with over 300k new phones activated every day! The recently announced Honeycomb iteration of the OS could make Android based tablets competitive with the iPad, eventually. These efforts in mobile operating systems are not big money makers for Google but they do position Google to dominate the all important mobile search market.
Google also owns the unquestioned leader in online video, YouTube. It paid a lot for YouTube (about $1.6 billion) and the unit was losing money for a number of years but that has now changed. Google recently disclosed that they are monetizing more than 2 billion YouTube video views per week. Google is also making headway in business apps (google docs) alternative energy (wind, solar and geothermal) and has ambitions in social media as well.
As for the brain-drain at Google, that is not a major concern to me. This is a topic which gets more publicity than is probably warranted and I believe that Google is doing a good job of keeping employees happy, albeit with higher salaries which effect margins. Having Larry Page back leading the company as CEO may make Google 'cool' again in the eyes of employees and young engineering talent.
With all of these positives going for Google, we could expect the shares to be richly valued but shares are trading at only 24 times TTM earnings and 16 times estimated earnings. With 35 billion in cash and revenue growth north of 25% I think shares are going higher and should be bought at these levels ($620's).
Baidu Blossoming
Across the Pacific, Chinese search leader Baidu is posting accelerating revenue and earnings growth while controlling an impressive 75% of the Chinese search market. Efforts to expand overseas have produced mixed results with one bright spot being the success in Japan. Baidu owns less than 4% of the global search market, giving it a long way to go to get close to Google, but also giving it plenty of room to grow.
Baidu is an expensive stock but deservedly so. Trading at about 86 times TTM earnings and about 35 times forward estimates, the valuation is rich but with year over year earnings growth of 171%, the price is justified. Baidu boasts a profit margin of about 44% meaning that a lot of the top line growth falls to the bottom line. With 1.24 billion in cash Baidu is well positioned to acquire new businesses and make investments as it looks to grow into the social media space. The company is also making progress with its online video site Qiyi (think Hulu) which now has over 100 million users.
Shares of Baidu look to be a little bit extended right now (approaching $130) but don't expect any major pullbacks, maybe a retreat to $120 at best. As long as the story remains intact long-term investors should be adding to positions on any dips.
The Google, The Baidu And The Ugly
In January 2010, Google exited China after hackers infiltrated their systems, stealing corporate secrets and compromising GMail accounts. With its new home in Hong Kong, Google still serves up search results to the Chinese but only after they are filtered by the Chinese government. In fact, it is an often overlooked fact that Google still holds about 20% of the search market in China, despite "leaving" China.
While investors are rightly concerned about Google's diminished roll in China I think the situation could play out in Google's favor. By not filtering their search results Google should gain the confidence of the Chinese people and be well positioned if the great firewall of China is ever lifted. Meanwhile Baidu is in full compliance with Beijing's filters, raising questions about the validity of their search results.
The Winner Is?
Even with the uncertainties surrounding the 'regulation' of the Internet in China and despite all the favorable numbers for Google, Baidu is the winner, by a nose. As the Chinese people move online Baidu's search numbers will continue to grow and the company's expansion into new products and markets will add to the growth story.
Google is the safer bet and should prove to be a solid investment for years to come but Baidu is in earlier stages of growth and has a very bright future. For investors willing to take on more risk Baidu could prove to be a big winner over the coming years, even after the big run-up. I own shares of both companies but if given the choice of owning just one I'd choose Baidu.
Readers may be wondering why I own shares of Google if I see both Apple and Baidu as better investments - a valid question. The reason is that the Google story is too compelling to ignore. The momentum and speculation that drove shares of Google to over $700 a few years ago is now being justified by real earnings and cash flows. For conservative investors Google is a great choice with less downside risk.
Baidu is my top pick but Google is not far behind. My 12 month price target for Baidu is $175
Disclosure: I am long BIDU, GOOG, AAPL.
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