Baidu (BIDU +4.56%) released its fourth-quarter earnings results on Wednesday. Top-line growth was fantastic. Revenue at the Chinese search leader climbed 50% to $1.573 billion, beating analysts' estimates. Bottom-line growth, however, was nonexistent.
After net income climbed just 0.6% in 2013, Baidu doesn't expect profit growth to rise very much in 2014, either. Morgan Stanley downgraded the stock from "buy" to "hold" due to the forecasted earnings weakness, but following the so-called smart money here might be a mistake. Baidu shares are priced very well compared to comparable companies Qihoo 360 (QIHU +0.00%), Yandex (YNDX 2.10%), and Google (GOOG +10.06%).
Why earnings is the wrong growth metric
Baidu grew its earnings more than 77.7% per year from 2008 through 2012. Growth was driven by the growth in China's Internet and marketing industry.
China's Internet population has more than doubled since 2008, but a lot of that growth has come from mobile users. In 2008, less than 40% of Chinese Internet users were on mobile devices. In 2013, that number climbed to 81%. In the meantime, desktop and laptop users fell 0.8% and 1.8% in 2013, respectively.
As the Chinese population connects to the Internet via mobile devices, Baidu must work harder and spend more to attract these users since it doesn't dominate mobile search like it does on the desktop. Its desktop search business is still strong, and it's making inroads with investments in mobile, among other areas. As the company establishes its footing in other areas like mobile and video, profits will return to growth.
With that in mind, a more accurate picture may be drawn from the company's continued strength in revenue growth. Revenue grew 62.5% annually from 2008 through 2012, and it grew another 43% in 2013. For the first quarter of 2014, the company expects an acceleration in revenue to 55% to 60% growth.
Comparing price to sales growth
|
Company |
Price-to-Sales Ratio (TTM) |
Expected Revenue Growth 2014 |
|
Baidu |
13.19 |
36.1% |
|
Qihoo 360 |
23.56* |
59.5% |
|
Yandex |
9.63 |
30.6% |
|
|
6.85 |
17.9% |
*based on revenue from Q4 2012 to Q3 2013
Source: Yahoo! Finance
After earnings, revenue estimates may be revised up for Baidu, since its first-quarter guidance topped analyst forecasts. Nonetheless, Baidu is currently offering better value for sales growth than any of the above-mentioned companies except Yandex.
Yandex operates in the rapidly expanding Russian Internet market, where it controls 62% of the country's search market. It grew revenue 37% in the fourth quarter, well behind Baidu's 50% growth. Still, the company is making progress in improving its product and presence outside of its home country by making deals with rivals Google and Facebook. Although its revenue isn't growing as quickly as Baidu's, it's trading at a relatively inexpensive price.
A better comparison may be to Google circa January 2008 -- the last time its price-to-sales ratio was as high as Baidu's is now. The company grew revenue 31% over the next 12 months. Back then, shares weren't quite as inexpensive as Baidu's are now, considering future revenue growth. But an investment in Google at the beginning of 2008 would have paid off quite handsomely. Google's share price increased nearly 86% since then.
Qihoo 360 represents Baidu's biggest threat, particularly in mobile. The company launched its search engine just two summers ago, and has quickly climbed to become the country's No. 2 search provider after Baidu. Through the strength of its security software, browser, and mobile assistant, Qihoo has won over nearly one-quarter of Chinese web searchers. Baidu's share, meanwhile, has fallen to about two-thirds. It should be no surprise that a lot of Qihoo's search traffic is coming via mobile.
Despite the market share gains, Qihoo didn't see much search revenue in 2013. Morgan Stanley estimates the company generated just $28 million in search ad revenue in the third quarter. But the newly hired John Liu, a former Google China exec, was brought on to help improve monetization. Still, valued at 23.56 times sales, it's a lot more pricey than Baidu.
No profit growth, no problem
Baidu's management is taking a long-term approach. It spent the last year snatching up key companies to better establish itself as a giant in the Chinese Internet ecosystem. Most notably, the company purchased the 91 Wireless app store -- the biggest in the country -- for $1.9 billion. It's expanding aggressively in mobile, video, and other endeavors, and will continue investing in 2014. Its strong revenue-growth expectations is a great sign for investors, who shouldn't worry about profits in the short-term.
