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Big technology stocks are stuck in the mud. Whether from fears of sinking PC sales, threats from cloud computing, or even just an inability to keep generating gains because of their massive size, the largest technology stocks have struggled to see recent gains.
However, that doesn't mean that all technology stocks are suffering from this malaise. In fact, a couple of large caps have seen rather impressive run-ups throughout 2011. Their success illustrates some broader opportunities for investors in the space. I screened for large cap stocks -- those with a market capitalization greater than $10 billion -- in the IT space that have seen the greatest share-price gains since the start of 2011. These three companies caught my eye:
Percent Gain in 2011
|Baidu (Nasdaq: BIDU )||$46.7 billion||38.7%|
|ARM Holdings||$12.7 billion||35.6%|
|Motorola Solutions||$16.1 billion||30.9%|
Source: Capital IQ, a division of Standard & Poor's.
In this article, I'll focus on the success of Baidu, and the forces driving its continuing rise. I'll also suggest one more company that could benefit from the same tailwinds pushing Baidu's stock northward.
What's driving Baidu?
Baidu's continued climb since the trough of the financial crisis has been stunning. The company is up more than tenfold since its January 2009 close, and on an ex-cash basis, it's now worth one-third the price of industry heavyweight Google (Nasdaq: GOOG ) . Considering that Google still maintains runner-up status in China and Russia, is the dominant search player in America and Europe, and is also out to a substantial lead in India, it's hard to see how these two valuations match up with one another. Yet Baidu trades for a 2012 P/E of only 34. That's not "cheap" by any stretch of the word, and it's well above Google's own 2012 P/E of 13, but it does illustrate how quickly the Chinese market is becoming connected, and how Internet-savvy the Chinese people are.
Think about it this way. China has a population of more than 1.3 billion. Yet the vast majority of that populace is extremely poor by Western standards. Among the more well-to-do citizens who live in urban areas, just 1.4% of households make more than $15,000 per year. In spite of this, Baidu is expected to post $1.4 billion in adjusted earnings in 2012. The implication is that Chinese consumers have different spending habits than their Western counterparts, spending far more of their time and disposable income online.
A surprise winner on the trend?
I'm going to suggest that China's spending habits stand to benefit a highly unexpected company, given Chinese consumers' low amounts of income relative to counterparts in developed countries.
That company is Apple (Nasdaq: AAPL ) .
That notion frankly shouldn't make sense. Apple sells premium priced products. In China, selling prices for the iPhone average $660 in U.S. dollars, while Android phones manufactured in China are targeting wholesale price points below $100. Yet Apple's still showing great traction within the country. Just look how Apple's Tim Cook described China in the latest company conference call:
Also, we continued to be on a tear in China. Greater China saw iPhone sales being up over three times, about 200 -- almost 250%. And this catapulted revenue for the first half or first fiscal half in Greater China to just under $5 billion, which is up almost 4 times year-over-year. And so we're extremely happy with how we're doing in China.
That $5 billion for the greater China region constituted 10% of Apple's revenue in the first half of the year. That's an impressive figure, considering Apple's still "feeling" out the market and has only four stores in China, with plans for a fifth. It's also impressive considering that according to Cook, more than 90% of Chinese iPhone users are prepaid, compared to the United States, where most users are on fixed postpaid contracts.
This isn't to say that Apple will experience similar market share in China relative to developed countries. Android should prove dominant in the country. However, it does appear that Chinese consumers are willing to spend a disproportionate amount on phones relative to other expenses. If Apple's early success in China can carry on, it illustrates that the company will be able to keep growing better than expected, even as smartphone growth begins shifting into poorer emerging markets.
To stay updated on any of the companies mentioned in this article, make sure to add them to our new free My Watchlist feature today. You'll get up-to-date information on all the companies and be able to monitor shifts in both search and mobile phones as they emerge in China: