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Better Buy: Baidu, Inc. vs. Google

By Daniel Sparks - Feb 18, 2016 at 2:00PM

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Is Baidu a buy before earnings? Compare it to Google to find out.

Ahead of Baidu's (BIDU 0.70%) fourth-quarter financial results next week, and following the stock's year-to-date sell-off of about 14%, some investors may be considering the Chinese online search company as a potential investment. One way to assess Baidu as a potential investment is to compare it to its big sibling in the U.S.: Alphabet (GOOG 2.36%) (GOOGL 2.39%). So, how do the two companies stack up?

Company

Market Capitalization

Net Margin

Trailing-12-Month Revenue Growth (YOY)

P/E

P/S

Baidu

$57 billion

19.7%

39%

32

5.8

Alphabet

$488 billion

22%

14%

30

6.9

Profitability
Both Alphabet and Baidu benefit from profitable business models. Alphabet, however, is slightly more lucrative per dollar of revenue. The larger online search company has a 22% net margin, which is defined as a company's earnings as a percentage of sales, and Baidu's net margin is 19.7%.

Baidu's lower net margin reflects the company's aggressive marketing aimed at capturing all the growth potential ahead. Its selling, general, and administrative expenses, or SG&A, represent 26% of total revenue. Comparatively, these same expenses represent just 20% of Alphabet's sales.

Baidu is sacrificing profitability in the near-term for its aggressive growth plans. Trailing-12-month EPS is down 4.5% while Alphabet's is up 15% during the same period. Baidu's SG&A expenses as a percentage of sales increased by nearly 500 basis points during the last twelve months, pressuring profitability.

In this same period, Alphabet's EPS increased 15%, highlighting the company's excellent ability at growing revenue while improving profitability simultaneously.

Growth
Baidu is the faster growing company of the two by a long shot. Revenue in the the trailing-12-months soared 39% compared to the year-ago quarter. This compares to Alphabet's revenue growth of 14% during the same period.

As the leading search engine in China, the company is poised to continue to benefit from growing use of mobile Internet and the rapid but still early transition in the country from 3G to 4G mobile Internet speeds.

Image source: Baidu.

But as is evident by an analysis of Baidu's profitability compared to Alphabet's, faster-growing revenue doesn't always translate to faster-growing profits.

Valuation
Valuation doesn't do a very good job at helping clear up which stock is a better buy. The two companies both trade similar premiums to earnings and sales. Baidu and Alphabet's price-to-earnings ratios are 32 and 30, respectively. And their price-to-sales ratios are 5.8 and 6.9, respectively.

But with the two companies' growth and profitability in mind, Google stands out as the better value between the two stocks. While Baidu is growing revenue at a faster rate, Google's more established global presence in online search paired with its faster-growing EPS makes the stock the more likely to reliably grow earnings over the long haul.

At the same time, this doesn't rule out Baidu as a potential investment; the Chinese search giant may be riskier, but it also has more upside potential if the company executes well on its growth opportunities in the years to come.

So, is Baidu stock a buy before earnings? Maybe. But Google may be a better bet.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Baidu. 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.

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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$121.68 (2.39%) $2.84
Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$140.36 (0.70%) $0.98
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$122.65 (2.36%) $2.83

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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