1 Number Had Alphabet Investors Concerned; but for Baidu, It Was All Smiles

In this segment of the Motley Fool Money radio show, host Chris Hill, Million Dollar Portfolio's Matt Argersinger, and Supernova and Rule Breakers' David Kretzmann consider the revenue situation of the two biggest search companies in the world: Alphabet (GOOG 0.37%) (GOOGL 0.35%) and Baidu (BIDU 1.24%).

At the Google-y half of the U.S. online advertising duopoly, the number of clicks it's getting on ads continue to rise. But the price it's paying per click is rising too, which is a problem. Baidu has a different concern: Chinese government regulators cut a big piece out of its business when they cracked down on fraudulent medical claims in healthcare ads on the site. But the company is rebounding nicely in a broad range of spaces.

A full transcript follows the video.

This video was recorded on July 28, 2017.

Chris Hill: Shares of Alphabet down a bit this week. Second quarter revenue rose 21%, but David, this is a search company, and the cost per click is going in the wrong direction.

David Kretzmann: Yeah. They're essentially making less revenue per click, but the number of total clicks are still going up, so that's why their top line is going up, but they're still seeing pressure on margins, especially this quarter. Partly that's due to the biggest growth contributors right now being YouTube and mobile, where the cost per click is lower. But here's why I don't think that's something that investors should worry too much about. 

YouTube has 1.5 billion monthly active viewers right now, and people watch an average of 60 minutes a day on their phones and tablets. That's an incredibly valuable and engaged audience. I think they'll be able to crack that code at some point down the road. They continue to test out different formats. They're no longer running 30-second ads on YouTube. They're doing a lot of six-second bumper ads, which seem to be more successful for a lot of brand advertisers on YouTube. When you have such a vast and engaged audience, I'm not too worried about quarter to quarter numbers like this.

Hill: If I send YouTube a check for $100, do you think they'll stop running those Groupon ads?

Kretzmann: I know you're not a fan of those, Chris. Maybe you can beat them out there.

Hill: Oh my gosh, they make me pine for the Trivago guy.

[...]

Another big day for Baidu. Second quarter profits for the Google of China came in big, and shares of Baidu up more than 11% on Friday. Here's what stuns me, Matt. This is a company that's, in terms of market cap, only a $77 billion company. That seems small, given how dominant they are.

Argersinger: It does seem very small. And that's one of the most compelling things about Baidu, because it's operating in a market that's conceivably bigger than Alphabet's, and it does virtually the same thing. That was a great quarter for Baidu. This is the first time that their business has lapped the problems last year where the Chinese government was cracking down on some of their advertising customers, because of the dodgy medical ads that they were displaying in search. They've gotten past that issue now, they've tightened up their advertising ranks. And what stood out to me was, revenue was up 14%, but the number of advertisers was down 21%. So, the average revenue per advertiser was up 32%. So, they've shrunk the advertising base, but it's a much more quality-aligned advertiser base. 

Two-year high for the stock. I would just say, they're really doubling down on AI and the search business, which is great, and video content, which I think is the right way to go. They've been investing a lot in food and travel and other things that haven't gained a lot of traction. Doubling down on video, especially, with iQiyi, which is their Netflix-type service, that's going to be big for them. They recently signed a licensing deal with Netflix for some of their content. I think that's a big area of growth for Baidu.

Hill: When you look at Alphabet, which has a market cap of somewhere 8X or 9X the size of Baidu, is Baidu a more attractive proposition for anyone who's thinking about investing in search?

Argersinger: I want to say so, but you have to factor in the risk there. This past year and a half, you've seen what operating in China can be like for a company like Baidu. So, you take that into account, I do think Baidu's growth rate should be higher than Google and Alphabet's over time. But, it comes with a lot more risk.