If you want to buy the leader in paid search, you're down to either picking up shares of global powerhouse Google (NASDAQ:GOOG), or making a more concentrated wager on China's Baidu (NASDAQ:BIDU).
As big as Google is in most countries, it's a distant second in the world's most populous nation. That isn't the only reason that I prefer Baidu to Google, but since I'm dueling with fellow Fool Tim Beyers this week over the market's best search stock, it's a good place to start.
Tim's drumming up a bullish case for Google today, and I'm sure it's a good one. Big G is an awesome company, and paid search is the sirloin of online advertising. I like Google. I just like Baidu a lot more.
On your marks
In its latest quarter, Baidu posted 41% and 24% gains in revenue and earnings, respectively. Google? Its non-GAAP bottom line was practically unchanged, on a modest 6% increase in revenue. Google also posted its first sequential top-line dip this past quarter. It's still an elite performer, but its game is slipping. Google is Brett Favre. Baidu is Matt Ryan.
Google is already a nearly $140 billion company, in terms of market cap. Baidu is just an $8 billion company. I'm not suggesting that Baidu will rise as Google declines -- Baidu's market-centric emphasis is more limiting -- but it's going to be a lot easier for Baidu to double for its investors, becoming a $16 billion company, than it will be for Google to earn a $280 billion price tag.
Don't take my word for it -- let's see what analysts think. They see Baidu growing its earnings by 31% this year, then accelerating with a 41% earnings-per-share surge come 2010. In other words, if you think Baidu is expensive at 52 times this year's earnings, look ahead to next year's profit target, which prices the stock at a more reasonable 37 times 2010's bottom line. It's not a conventionally cheap multiple, but you did notice how Baidu's growing earnings at an even headier clip, right?
Google is fetching just 18 times next year's earnings, but Wall Street's brightest see Big G's earnings growth clocking in at just 8% this year, and 14% in 2010. In other words, Baidu is the only one whose 2010 earnings growth is higher than its proposed earnings multiple.
Get set
There are numerous reasons why investors should have at least some exposure to the Chinese Internet market:
- The country's economy is growing faster than the rest of the developed world.
- Internet adoption in China is still early in its growth cycle.
- China's $586 billion stimulus package in November was refreshingly proactive, likely helping to nip the country's share of global recessionary pressures in the bud.
Baidu isn't the only way to play China's growth. Investors can certainly warm up to cheaper stock plays:
- Google may be a distant silver medalist, but you have to squint to find the bronze medalist.
- Sohu.com (NASDAQ:SOHU), the company behind the Sogou.com search engine, is trading at a cheaper multiple than even Google. It's also growing a lot faster, mostly as a result of its controlling stake in online gaming specialist Changyou.com (NASDAQ:CYOU).
- Yahoo! (NASDAQ:YHOO) hasn't made a dent in China the way it has in other Asian markets like Japan, but its 40% stake in Alibaba gives it a foothold in a fast-growing collection of Chinese Web-based businesses.
- Chinese display-advertising leaders such as SINA (NASDAQ:SINA) and Allyes parent Focus Media (NASDAQ:FMCN) trade at cheap prices.
Still, why settle for anything less than the best? If that's the argument for buying Google domestically, then it's the same case for buying Baidu, which offers the choicest cut among China's paid-search stocks.
… Go?
Baidu is no saint. It always seems to be making headlines for all of the wrong reasons, but the bad press doesn't seem to be shaking any of its users. Google may have a great product and a fatter billfold, but China appears to be rooting for its local favorite.
Even as Web use in China continues to explode, Baidu's launching new initiatives like an online marketplace and a Japanese search engine offer. These fresh ventures offer logical ways for Baidu to build on its market leadership position at home.
Google may be fine and all, but in this case, you'd be settling for second place. In China, Baidu's the way to go.
A quick search for further Foolishness:
- Read Tim's argument for Google.
- Tim and I disagreed on Google's prospects two months ago.
- Baidu picked up a pair of analyst upgrades three months ago.
