Contrary to what many people think it means to be diversified, highly successful Wall Street analyst Eddy Elfenbein says that, "You can be well diversified in as little as eight stocks." When building out my retirement portfolio, I took that advice to heart, picking just one company to fulfill all of my energy stock needs.
Investors looking to gain exposure to the world's fastest growing economy -- China -- have no shortage of choices. SINA (Nasdaq: SINA ) owns the rights to the "Twitter of China," while Renren (NYSE: RENN ) and Dangdang (NYSE: DANG ) are often touted as the Facebook and Amazon.com of China, respectively.
Though these comparisons do a good job of giving the average investor an idea for what each company does, the companies behind them aren't carbon copies of their American counterparts. SINA and Renren both have to deal with a Communist regime that can be hostile to a free and open Internet, while Dangdang is far from the only e-commerce play in its home country.
If investors are looking for one company in a small portfolio to give them excellent exposure to China, there's no better choice than Baidu (Nasdaq: BIDU ) . Read below to find out why the company, and its price, is appealing. At the end, I'll offer you access to a special free report on another upstart company you need to consider for your portfolio.
Just the basics
If you're new to Chinese stocks, Baidu is the leading search engine in China. Unlike the companies mentioned above, saying that Baidu is the "Google (Nasdaq: GOOG ) of China" is an appropriate comparison. Just as Google has a core search and advertising business supplemented by moves into mobile and cloud services, Baidu is following in much the same growth path.
Just this week, Baidu came out with second-quarter numbers that were very impressive. The company beat on both revenue and earnings estimates. Though Baidu was helped by a favorable tax break, there was no denying that it is building itself to be the main Internet hub for Chinese citizens for decades to come.
The most important numbers -- other than impressive 60% increase in revenues -- come from a strengthening core business with a commitment to keep innovating. The company increased its list of online marketing customers -- the main source of revenue -- by 18% over the same time last year. Just as important, each customer was contributing 35% more revenue than it was last year. The advertising proposition Baidu offers clearly works, or advertisers wouldn't be willing to continue paying more for its service.
Though some on Wall Street may decry the fact that research and development costs increased by 83% -- outpacing the revenue increase -- I think this is a good sign for the company's future. Baidu needs to spend money on top talent if it wants to stay ahead of the game. China's Internet marketplace is just taking shape, and Baidu has an enormous opportunity to solidify search, mobile, and cloud services.
Maybe mobile won't be that bad
One of the biggest concerns investors have with both Google and Baidu is the fact that we are using mobile devices for computing far more than we used to. Because each company earns less for mobile advertisements than those performed on desktop computers, there's the chance that margins could shrink significantly.
But listening to each company's conference call, fellow Fool Joe Tenebruso noticed a very important message emerging:
On Baidu's conference call, I heard something that I also heard on Google's earnings call: Mobile search is mostly incremental to desktop search. This is a key insight because many investors mistakenly believe that mobile search is cannibalizing the much more profitable desktop search business. Both Baidu and Google have said that this is not the case.
As Joe later explains, this makes sense. People use their desktop or laptop computers to perform searches during working hours, and utilize their mobile devices outside of work. The bottom line is, people couldn't conduct any Internet searches while on the go before -- so mobile searches are more additive than they are punitive.
Though the stock is up over 10% today, it still trades for a price-to-earnings ratio of about 30. Though that's certainly not low, the company grew earnings by 72% this past quarter, and is expected to grow earnings by 40% over the next year. That, along with its market-leading position in the world's fastest-growing economy, makes it look like a strong buy today.
I've put my money where my mouth is, holding shares of Baidu in my personal portfolio, and having a bullish CAPScall on my All-Star profile as well. If you'd like to hear about another company I own to cover the social networking part of my portfolio, I suggest you check out our special free report: "Forget Facebook -- Here's the Tech IPO You Should Be Buying." Inside, you'll get the name of this booming company you shouldn't miss. Get your copy of the report today, absolutely free!