In the following video, Motley Fool tech and telecom analyst Andrew Tonner points out that there may be opportunity in Baidu (NASDAQ: BIDU) (aka the "Chinese Google" (NASDAQ:GOOGL)).
Brendan Byrnes: Hi Fools, I'm Brendan Byrnes and I'm joined today by our Tech and Telecom Analyst, Andrew Tonner. Andrew, let's talk dominant American search engine, Google, versus dominant Chinese search engine, Baidu. Baidu trading cheaper; does that make them the better buy when you look at those two?
Andrew Tonner: It does. But at the same time, I think these are two companies I'd say that I really like because I just love the general business model.
These companies are both the dominant players in their respective industries, basically Google controlling the global search market with over 60% global share, and then Baidu having its bastion of strength in the only place where Google doesn't have a major presence, China.
Basically having that same sort of market share, the 60% or higher numbers are a bit fuzzy to nail down, but it goes to show that both of these companies basically have a monopoly on their respective geographies, and it's such a beautiful model, paid search.
The advertising rates, the premiums you're able to generate because you can lock in a better match, it's a fantastic business model, and you see that come through the margins. Both of these companies are 25%-plus profit margin companies, and they both enjoy the tailwind of growth in overall Internet traffic expansion, especially for Baidu.
At the same time, these companies are both being very proactive on the mobile front as well. Google, of course, with their Android operating system being the de facto mobile OS, basically throughout the entire world and in China, but at the same time with Google's wings being clipped in China, Baidu has moved in there and even on mobile has a huge presence.
Brendan: It's on Android phones, a lot of the time, right?
Andrew: Yeah, actually they power 80% of overall searches on Android phones in China. They're also now the default search engine for Chinese iPhones with the iOS upgrade as well, so they're beautifully positioned for the mobile future.
I think the breakdown of why exactly I like Baidu more than Google -- although again I'm very bullish on Google as well -- is the multiple versus the growth expectation. You see Baidu right now trading at ridiculously low multiple; a sub-20 multiple for a company that was basically punished ... we saw the stock sell off at 10-plus percent after its earnings announcements.
Basically the midpoint in their guidance was $6 million shy of the analysts' average estimate, but at the same time that number represented a 42% increase from the same quarter a year before. I think you're seeing a not being able to see the forest through the trees situation, when you look at Baidu.
It's a company that has a huge cash balance, a hugely profitable business that will be incredibly difficult to disrupt. There's talk about potential competition from Qihoo 360, who entered the search engine business in China in the second half of 2012, but none of the numbers we're seeing so far come out have indicated there's any threat to Baidu.
At the end of the day, it's a tough call but I like Baidu better.
Brendan: Yeah, I think both are positioned very well, long-term. Baidu maybe a little bit cheaper, maybe slightly higher growth prospect, just because a little bit longer room to run, but overall two phenomenal companies.
Thank you, Andrew, for your time. Head over to Fool.com for more analysis.
Andrew Tonner owns shares of Baidu. Brendan Byrnes owns shares of Baidu. The Motley Fool recommends Baidu and Google. The Motley Fool owns shares of Baidu and Google. 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.