Better Buy: eBay or Baidu?

Two of the Internet's most prolific companies -- eBay (Nasdaq: EBAY  ) and Baidu (Nasdaq: BIDU  ) -- posted better-than-expected quarterly results last night.

However, there are so many differences between the two reports that I figured I would contrast the meandering stateside giant with the Chinese rock star.

Let's start overseas with Baidu, where revenue soared 74% to $282.3 million, with earnings more than doubling to $123.5 million -- or $0.36 a share on a non-GAAP basis. Analysts were banking on an adjusted profit of $0.31 a share on $276.7 million in revenue.

Naturally, Baidu's heady growth will make most domestic dot-coms look like slackers in comparison. Good luck finding a stateside speedster checking in with 44% in net profit margins! However, eBay didn't fare all that badly; especially once you back Skype out of the equation, since eBay is down to just a minority stake in the voice chat platform.

Excluding Skype, eBay's adjusted profit climbed 18% to $0.40 a share, with revenue inching 15% higher to $2.22 billion. Wall Street was expecting a tweaked profit of $0.38 a share on $2.17 billion. It's true that eBay simply bested analyst targets -- while Baidu blasted past the pros -- but it's still a decent quarter on its own for eBay.

It's true that the valuations are also mismatched. Based on last night's close -- and last night's forward expectations -- Baidu was trading at 37 times next year's projected profitability. eBay was fetching a mere 11 times 2011's bottom-line target. Is Baidu worth a multiple that is 3-4 times greater than eBay's valuation? Growth stock investors would argue that Baidu is more than worth the premium, since it's growing its top and bottom lines at an even greater multiple than eBay.

There is also a wide disparity in the company's namesake businesses. Baidu's search engine stands to grow market share, given Google's (Nasdaq: GOOG  ) quasiretreat from China this year. A sluggish turnaround is still trying to take place at eBay's auction marketplace, since its PayPal financial transaction platform is the one bringing home the bacon these days.

Then again, investors may appreciate the variety in eBay. Baidu's smaller rivals are all over the place. Sogou.com parent Sohu.com (Nasdaq: SOHU  ) is a beefy player in online gaming with its Changyou.com (Nasdaq: CYOU  ) subsidiary. Baidu, on the other hand, lives and dies on the strength and popularity of its search engine.

Risk-tolerant growth investors who don't mind flooring it in the pursuit of market-thumping returns would be naturally drawn to Baidu. China's Internet migration is still in its infancy, and Baidu should have several years of explosive growth on its hands. Value investors would be more comfortable with eBay, though they are best served appreciating it for the market-leading presence of PayPal than its original marketplace site.

There are different dot-com strokes for different dot-com folks.

Do you think eBay or Baidu is the better investment? Share your thoughts in the comments box below.

Baidu, Google, and Sohu.com are Motley Fool Rule Breakers picks. eBay is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a bull call spread position on eBay. The Fool owns shares of Google. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz has only been to China once, but he relishes admiring its dot-com revolution from afar. He does not own shares in any of the stocks in this article. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On August 02, 2010, at 9:16 PM, j398112 wrote:

    As a former platinum level high volume ebay seller and paypal user who has moved totally to Amazon and elsewhere let me assure every investor that only a fool would risk a penny on ebay. In a word, ebay makes money by misleading and cheating its customers using techniques such as "best match" and the encouragement of buyer fraud* - and that is not the basis for a viable business plan. As a result its marketplace and associated use of Paypal by businesses are already in steady decline in North America where it is best known. Presently ebay is still able to add more non-ebay paypal and marketplace by recruiting more new "fools" outside the United States than it is loses overseas via its questionable ethics. But as in the US markeetplace its overseas users will begin to drop away as they come to be pushed away by the company's ethic so that at some point, as happened in the US, there will not be enough new fools recruited to replace them. A prudent long term investor might consider doing what I have done - shorted ebay. * Note on an example of buyer fraud: ebay encourages crooked buyers to buy items, receive them, and then claim a refund, because then the crooked buyers resell on ebay and ebay gets the fees for two sales instead of one. That simultaneously pumps up ebay's short term results, and discourages sellers like me who once paid thousands of dollars in fees each month to sell elsewhere. So in the long run ebay's marketplace fees and associated paypal fees will decline overseas as well as foreigners experience the company's ethics. In essence, ebay is choosing to post bigger short term profits and accepting the resulting smaller long term profits. Amazon is the reverse.

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