Sell Baidu, Buy Alibaba?

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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  • Report this Comment On September 18, 2014, at 8:08 AM, jargonific wrote:

    If you are going to do it at least read this: http://www.marketwatch.com/story/alibaba-corporate-structure...

    "NEW YORK (MarketWatch) -- Alibaba Group Holding Ltd.'s BABA, +0.00% corporate structure is "dangerous," and will leave shareholders with no ability to influence management or legal recourse should problems emerge, influential emerging market fund manager Mark Mobius told CNN Money. "You'd have to go to a Chinese court and it would be very difficult, maybe even impossible," said Mobius, who is head of emerging markets at Franklin Templeton Investments. "The founders have control of the key assets of the company and if something goes wrong there's nothing you can do about it. This is the bottom line." The fund manager's comments come just ahead of the pricing of Alibaba's initial public offering later Thursday on the New York Stock Exchange, in what is expected to be the biggest ever listing in the U.S. at up to $25 billion. The Chinese e-commerce giant is using a structure known as the "variable-interest entity," a method used by other Chinese tech companies that list in the U.S., such as Baidu Inc. BIDU, +1.63% That means an investor buying the shares is really buying a stake in a Cayman Islands-registered entity which is under contract to receive the profit from Alibaba's lucrative Chinese assets but will not actually own them."

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