Best Buy in Search for 2013: Google, Baidu, or Yandex?

I'm thinking of a publicly traded search engine that's been posting market-thumping growth rates for years. It also happens to currently be trading at a discount to its forward earnings growth rate. Google (NASDAQ: GOOGL  ) ? China's Baidu (NASDAQ: BIDU  ) ? Eastern Europe's Yandex (NASDAQ: YNDX  ) ?

Don't worry. They're all correct answers.

All three of the Nasdaq-listed search engines seem to be trading at compelling values.

Google is the global leader, of course. From Western Europe to India to North and South America, Big G is the search engine of choice. However, Google isn't much of a force in China. The market -- home to the world's largest online audience -- belongs largely to Baidu. Yandex is the market leader in Russia, as well as a few neighboring Eastern European nations.

They're all relevant. They're all cheap relative to their growth rates. Which one should you buy in 2013 if you can't just snap up all three?

Let's explore the unique challenges that all three are facing these days, before moving on to the meatier opportunities.

Clearing hurdles
Google's a rock star. The stock hit a fresh all-time high just two months ago, and that's something that doesn't apply to the somewhat out-of-favor Baidu and Yandex.

This doesn't mean that Google is perfect. It actually missed Wall Street's profit target in its most recent quarter. It has come up short twice over the past year.

There are also reasons to be concerned. Where do we go from here? Analysts see earnings growing just 16% in 2013, and we can't dismiss the looming threat of Facebook (NASDAQ: FB  ) .

Yes, Facebook. CEO Mark Zuckerberg revealed this summer that he has a team working on search. Google can't ignore this. Through its billion active users -- and more importantly the 140 billion connections between friends -- Facebook will be able to deliver personalized results in a way that Google just can't. If it takes off, Google's going to have a problem.

Baidu has its own unlikely nemesis. Qihoo 360 (NYSE: QIHU  ) , a popular provider of online security solutions and the company behind China's leading Web browser, rolled out its own search engine this summer. It has been a rookie sensation. Baidu's still serving up roughly two-thirds of the searches in China, but Qihoo 360 has claimed a 10% to 15% share of the market too quickly to ignore.

Finally, we have Yandex. The Russian seeker alienated investors last year when its CEO gave a meeting of hedge fund managers an uneasy outlook that the company hadn't shared with the rest of its investors. Yandex has overcome the selective disclosure stumble, but revenue growth is understandably decelerating as its markets mature.

Room to run
Thankfully, all three companies have more positive catalysts than negative ones.

Google's Android is the global standard in mobile, giving it the inside track on monetizing wireless communications. Google is also the cheapest of the three, fetching just 15 times forward earnings.

Baidu is still growing at a brisk pace. The pros are targeting revenue and net income to climb 36% and 27%, respectively, next year. It's making inroads in mobile, though obviously not as successfully as Google has done. However, Baidu shares can be had for just 16 times forward earnings. Despite China's geopolitical risks, the stock has never been this cheap on a forward earnings basis.

Yandex may seem to be the most expensive of the three at 20 times next year's projected profitability, but it is also growing faster than the multiple suggests. It also doesn't have an active challenger the way that Baidu does with Qihoo 360, though it bears noting that Yandex's 60% share of the Russian search market is less than than Baidu in its home country.

Buy them all -- but buy Baidu first
All three stocks should beat the market in 2013, but there are a few reasons to warm up to Baidu.

  • Unlike Google and Yandex, Baidu has beaten Wall Street's profit targets in each of the past four quarters.
  • The 36% revenue growth rate that analysts are forecasting for Baidu in 2013 is greater than Yandex at 32% and Google at 25%.
  • Baidu's home market of China is still earlier in the online migration process, so it should continue to grow at a headier clip.

You probably can't go wrong with any of these three speedsters. They all happen to toil away in the most lucrative chunk of the online market: paid search.

Buy Baidu if you have to choose one. Buy them all if you can.

Betting on China
Regardless of your short-term view on the Chinese economy, there may be opportunity in Baidu. Our brand new premium report breaks down the dominant Chinese search provider's strengths and weaknesses. Just click here to access it now.


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