The "Google of China" Is Undervalued and Growing

Low internet penetration levels in China provide room to grow. Baidu, the market leader, is likely to continue its upward trend with more capital and better technology.

Jun 11, 2014 at 9:00PM

With a lot of space for growth in the Chinese Internet industry due to low penetration levels, search service providers like Baidu (NASDAQ:BIDU) and Qihoo (NYSE:QIHU) are poised to grow in the coming years. Baidu is better-positioned than its competitors due to its leading market share, strong financial position, and differentiated search and mobile products, thanks to its integrated location-based services. Moreover, potential R&D efforts lead by Google's former artificial Intelligence chief, Andrew Ng, make future prospects seem even brighter.

Baidu is famous for its web search services in China, and is often compared to Google (NASDAQ:GOOG) (NASDAQ:GOOGL). The company generates nearly all of its revenue through an advertisement-based model. In addition to search, the company also owns a third-party Android app store, which gives it access to the app ecosystem. Baidu also owns e-commerce website Nuomi Holdings to seek growth from e-commerce platforms. The company has been showing impressive financial performance in recent quarters and is expected to continue doing so.

Industry and competition dynamics
The Internet penetration level in China is around 42%. This is expected to increase in the next few years, as the country's Internet user base is set to grow to 800 million by 2015, translating to approximately 60% penetration. Baidu's market share was around 63.5% as of December 2013, compared to a 71% market share back in 2012.

 Jpg

Source: Tech in Asia

Qihoo recently launched its search service and achieved a 22.5% market share. The company's target of a 35% market share may be difficult to achieve, and even if it was able to do so, it would be tough to maintain. Baidu invests a lot in R&D, and this factor comes into play in the long run. Moreover, Baidu's integrated location-based services and hiring of Google's former AI chief further threatens Qihoo's chances of expanding its market share.

 Jpg
Source: Tech in Asia

For instance, when searching for "Starbucks," Qihoo simply returns a list of links, while Baidu provides the nearest location, plus reviews and ratings from users, similar to Google's search results. The quality and depth of search results are paramount, especially in the mobile space, where location-based search is preferred.

Financial highlights
Baidu posted revenue of $1.53 billion in the first quarter of 2014, which equates 59.1% growth on a year-over-year basis. The main revenue drivers include an 8.8% increase in active online marketing customers, along with a 44% increase in revenue per customer. These results reflect the implementation of a strong monetization policy.

Net income was $407.8 million, an increase of 24% over last year. Earnings grew relatively slower than revenue, mainly because of increased sales and marketing, R&D, and content costs. The company is investing in personnel and R&D, a rational approach given the growth rate of the industry. Margins will remain under pressure for now, but this policy is in the long-term best interest of the company.

Baidu is trading cheaply, as far as investment value is concerned. The forward P/E of the company is around 22.60, compared to 23.25 for Qihoo.

 

Google

Facebook

Qihoo

Baidu

Forward P/E

17.92 

34.59 

23.25

22.60

Understand that Google and Facebook are ranked first and second, respectively, in terms of Internet traffic, while Baidu is fifth.

Facebook's P/E is higher than Baidu's because Facebook has a global reach and more room to grow. However, a higher P/E also increases downside risks and thus Baidu, with a lower P/E, is a less risky investment.

Key advantage and the bottom line
Baidu recently appointed Andrew Ng to head its labs in Beijing and Silicon Valley. He was a faculty member in computer sciences at Stanford University, and contributed to artificial neural networks during his stay at Google. Strong AI leads to better search services, and leveraging Mr. Ng's AI capabilities, along with his experience at Google, will help Baidu improve future offerings.

The company is turning out to be the Google of China. Regulatory intervention did not allow Google to dominate the search market in China, and Baidu's knowledge of the language and culture puts it ahead of Google in its local market. The bottom line is that Baidu is focusing on improving its capabilities, and already holds the lion's share of the market. It has the balance sheet strength and other resources to consistently lead China's Internet space. Add the recent focus on AI and R&D to the mix, and it's clear that other local search players will find it difficult to compete with Baidu.

Are you ready for this $14.4 trillion revolution?
Have you ever dreamed of traveling back in time and telling your younger self to invest in Apple? Or to load up on Amazon.com at its IPO, and then just keep holding? We haven't mastered time travel, but there is a way to get out ahead of the next big thing. The secret is to find a small-cap "pure-play" and then watch as the industry -- and your company -- enjoy those same explosive returns. Our team of equity analysts has identified one stock that's ready for stunning profits with the growth of a $14.4 TRILLION industry. You can't travel back in time, but you can set up your future. Click here for the whole story in our eye-opening report.

Muhammad Saeed has no position in any stocks mentioned. The Motley Fool recommends Baidu, Facebook, and Google (C shares). The Motley Fool owns shares of Baidu, Facebook, and Google (C shares). 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers