It's been a wild week for the search engine stars. Google (NASDAQ:GOOG) barreled past the $700 mark with ease, and China's Baidu.com (NASDAQ:BIDU) lapped the $400 this afternoon.
Instead of looking ahead to the next round number -- or falling back to one during a reasonable correction -- let's take things up a notch. Here is the question to toss your tech stock investing buddies over the weekend:
What do you think will happen first? Google at $1,000 or Baidu at $500?
The milestones may seem distant. They are 25% to 40% away from the stocks' current prices. Then again, have you checked Google's and Baidu's growth rates? They can gain that much in less than a year and still have their P/E ratios contract.
So where do you stand? Even if it takes several years to get to those chunky mile markers, surely you have an opinion.
Betting on Baidu
Me, I'd have to go with Baidu, but it's not an easy decision. Sure, Baidu is just 25% away from $500. Google would have to appreciate by more than 40% to hit $1,000. The distance is shorter for Baidu, on both an actual and percentage basis.
I'm going out on a limb and not only because I'm favoring China's search engine leader over the stateside darling. I'm also pressing up against steep valuations.
Google at $1,000 would price the stock at 49 times next year's projected earnings. If you think that's rich, Baidu at $500 would price the shares at a hefty 124 times next year's bottom-line estimates.
Pretty outlandish, right? It's certainly not for the squeamish, but let's approach those multiples from a different angle. Google has obliterated Wall Street estimates in 11 of its first 13 quarters as a public company, while Baidu has blown the pros away in seven of its first nine public quarters. (It merely met expectations once, and missed by a penny per share the other time.)
Target busters
Quarter after quarter, Google and Baidu smash their earnings targets, sending analysts scrambling to craft new ones. Over the past three months, Baidu's 2008 forecast has gone up from $3.60 to $4.02 a share. Google's 2008 consensus has risen from $19.49 to $20.59 a share. It may not seem like a dramatic move in quarterly chunks, but it can really add up over time.
The best way to illustrate this? Hop into a virtual time machine and go back to each company's IPO. Plenty of cynics felt that Google was overvalued when it went public at $85 three years ago. And more than a few jaded investors passed on Baidu when it went public at $27 two years ago.
It seems laughable now, but those prices seemed high because no one was projecting the kind of earnings that the companies went on to produce. Revisit where analysts stand now with those forward estimates. How many of those cynics and jaded investors would scoff at paying four times Google's earnings four years out, or less than seven times Baidu's profitability three years out?
Not many.
Hold on a second...
"But wait a minute, Rick," you may interject -- and I hope you do. "You can't go back to those prices."
You're right. Google isn't at $85. Baidu isn't at $27. But who's to say what Baidu or Google will look like three or four years from now, especially if historical trends continue? I'm not suggesting that today's prices will be seem equally tempting in retrospect, but you'd be nuts to tether yourself to analyst 2008 projections for either company when the pros have aimed low -- and substantially lower, the further out you go.
If you're bored, pull up the charts for Apple (NASDAQ:AAPL) and Intuitive Surgical (NASDAQ:ISRG). They have beaten analyst estimates for 19 and 20 straight quarters, respectively. Good things happen when you overdeliver, no matter what your sector.
Riding the leaders
Market leaders in high-margin areas like search engines enjoy clear scalable advantages, becoming the places advertisers go. There's a reason Google has been a consistent analyst-beater while other stateside search players like Yahoo! (NASDAQ:YHOO) have gone through growing pains.
Baidu has an even broader market-share advantage in China. Just as smaller search players like MIVA (NASDAQ:MIVA) have turned to Google, Chinese heavies like Microsoft's (NASDAQ:MSFT) MSN China have handed the keys to Baidu.
In short, the rich get richer in paid search.
I'm not naive. I realize a lot can go wrong. I also realize Google and Baidu may revisit $600 and $300, respectively, before hitting fresh milestones on the way up. But I'll stick to my belief that, no matter how long I have to wait, Google will be at $1,000 -- and Baidu at $500 -- someday.
If you do get asked that question over the weekend -- Google at $1,000 or Baidu at $500? -- the right answer isn't a choice. Just nod your head.
More on two search giants:
