On the surface, tech giants Facebook (FB 2.52%) and Baidu (BIDU 1.68%) appear to have little in common.
Baidu is the largest search engine in China, where Alphabet's Google search engine remains blocked. Facebook is the world's largest social network around the world -- except in China, where government censorship policies prohibit its operations as well.
However, looking beyond their current operations to where the tech industry is headed, the companies share some other telling similarities. Let's review a number of important business drivers to help get a clearer sense of which tech company's stock looks like the better buy today.
Financial fortitude
As two companies that essentially print money, both Facebook and Baidu are in fine financial shape:
|
Company |
Cash and Investments |
Debt |
Cash From Operations |
Current Ratio |
|---|---|---|---|---|
|
Baidu |
$15.5 billion |
$10.5 billion |
$22.2 billion |
1.7 |
|
|
$32.0 billion |
$0 billion |
$17.6 billion |
12.6 |
Data sources: Yahoo! Finance, S&P Global Market Intelligence.
Understanding a company's solvency and liquidity is a crucial first step in researching investments. In this case, there's no bad option between Facebook and Baidu. Facebook wins on net-cash balance (cash and investments minus debt). The high-margin nature of their online ad platforms allows both companies to generate ample amounts of cash flow, though Baidu edges out Facebook here. Finally, Facebook clearly slips past Baidu on short-term liquidity, though again, both companies are in great shape.
We're looking at an embarrassment of riches with either company, but given its advantage in cash on hand and cash-flow generation, Facebook claims a narrow win here.
Winner: Facebook.
Image source: Facebook.
Durable competitive advantages
Facebook and Baidu both enjoy meaningful competitive advantages in their core businesses.
For Facebook, the company dominates social media so overwhelmingly that no one poses a threat. In its most recent earnings release, Facebook reported 1.94 billion monthly active users (MAUs) and 1.28 billion daily active users (DAUs). Light-years behind is Twitter, which doesn't disclose DAUs but had just 328 million MAUs as of its most recent earnings report. Meanwhile, Snap announced in its first earnings report as a public company that its audience stands at 166 million DAUs. You get the idea. No one holds a candle to Facebook.
In much the same way, Baidu towers over the search business in China. Though specific numbers are hard to come by, it's agreed that Baidu's search-engine market share in China sits well north of 60%. Much like Alphabet, this dominance gives Baidu a steady stream of profits, allowing it to plow headlong into a number of long-term growth markets in China, including mobile payments, mapping, online restaurant delivery, and much more. Baidu management believes these new markets represent a $400 billion addressable market on top of its still-growing search business.
However, Baidu and Facebook are both increasingly focusing their long-term visions on developing next-gen technologies such as artificial intelligence and machine learning, and both have launched research arms to expedite the development.
The bottom line here is that Baidu and Facebook stand among the strongest names in all of technology, so let's call this section a tie.
Winner: Tie.
Valuation
Let's compare the two companies' valuations. Here are three commonly used metrics to shape this final piece of our discussion:
|
Company |
P/E |
Forward P/E |
P/Cash Flow |
|---|---|---|---|
|
Baidu |
38.0 |
31.9 |
18.5 |
|
|
38.3 |
30.9 |
25.0 |
Data source: Morningstar.
No, you aren't seeing double. Facebook and Baidu just happen to share virtually identical current and forward earnings multiples.
These multiples might appear rich, given the S&P 500's 25.9 P/E ratio. However, there's little doubt that both Facebook and Baidu belong to an elite group of growth stocks that should be able to grow at above-average rates well into the future. However, Baidu deserves the slightest of edges here because of its somewhat lower price-to-cash flow multiple.
Winner: Baidu.
And the winner is... a tie
Facebook and Baidu are both respected companies here at the Fool, and they have been for some time. Their performance here shows you why. Both earn passing marks in each of the categories we've analyzed.
Baidu and Facebook are each playing leading roles in creating our increasingly tech-driven futures, and long-term investors would do well considering either name for years to come.
