Sell Baidu, Buy Alibaba?

Alibaba files to go public, and Baidu may be in its crosshairs.

May 7, 2014 at 1:05PM

Baidu (NASDAQ:BIDU) may no longer be the ultimate dot-com darling among Chinese growth stocks. Alibaba Group Holding officially filed to go public with the SEC last night, giving potential investors a glimpse into the Internet giant that rules over online commerce in China.

For years, we've been hearing about Alibaba's reach. Its namesake B2B platform is the wholesale juggernaut in the world's most populous nation. Taobao is the country's top consumer-facing e-commerce site. Now we will have a chance to own a piece of it.

Alibaba's bigger than you probably thought. We're talking about 231 million active buyers placing 11.3 billion orders -- entering into $248 billion in transactions -- across its various sites last year. Alipay, best described as the PayPal of China, helped facilitate $519 billion in exchanges last year.

One would expect a company this big to be mature and growing slowly, but don't underestimate China's economic growth and its online infancy. The same factors that have made Baidu a superior grower relative to other search engine providers outside of China are also working in Alibaba's favor when it comes to commerce. If anything, the potential for Alibaba is even greater because the brick-and-mortar retail infrastructure in China is well behind the rest of the developed world. The allure of e-commerce is bigger and brighter.  

Revenue soared 72% to nearly $5.6 billion in fiscal 2013, which ended in March of last year. Alibaba's top line has soared another 63% through the first three quarters of fiscal 2014. Profitability has grown even faster, and Alibaba's net profit margin of 43% through the past nine months is enough to make just about any stateside dot-com envious.

Baidu is no slouch. Revenue soared 43% to $5.3 billion last year, accelerating in its most recent quarters. Its net profit margin slipped to 33%, down from last year's stunning 47% as it invests in lower-margin mobile and online video initiatives.

It's a fair match, but Alibaba's generating more revenue and far more profitability. It's also growing faster, though that may be changing. Baidu's revenue climbed 50% during last year's fourth quarter, followed by a 59% surge this time around. However, before we consider the better buy, we'll have to see the market price Alibaba. Analysts see it commanding a market cap as low as $150 billion to as high as $250 billion when it does hit the market later this year. That leaves Baidu -- at $53 billion -- a relative bargain before we consider a more than likely IPO pop. The greater that Alibaba's ultimate value is to the market the more compelling that Baidu becomes, especially as Alibaba's impressive numbers validate an investment in China's booming online economy.

You don't have to sell Baidu when Alibaba becomes available. If the price is right on Alibaba, the best move will be to own both.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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