At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Bankers bank on Baidu
By now, you've heard the news: Google (NASDAQ:GOOG) got hacked. And in an unprecedented act of Don't Be Evil-ocity, Google threw down the silk gauntlet yesterday, grabbing headlines at The Wall Street Journal as it essentially accused the Chinese government of backing "a highly sophisticated and targeted attack on our corporate infrastructure ... the theft of intellectual property from Google ... [and similar hack-attacks on] at least twenty other large companies."
This, it seems, was the final straw for Google. The company that initially kowtowed to Beijing in 2006, agreeing to "censor some results" on its Google.cn search engine, now says it "may well" have to "shut down Google.cn, and potentially our offices in China."
They've had all they can stand, and they can't stands no more!
Shares of Chinese Internet search giant Baidu (NASDAQ:BIDU) surged in response to the Google Ultimatum, and to understand the relationship between the two events, you need look no farther than the upgrades that soon emanated from the major Wall Street banks.
According to UBS, because Baidu and Google account for 95% of all Internet searches in China, Google's departure will leave Baidu essentially unopposed in the country. Transferring Google's market share to Baidu increases the value of the latter's shares (in UBS's estimation) to as much as $523 -- and merits an upgrade to "buy."
Likewise Piper Jaffray, which thinks there's a 35% chance that Google will wind up packing its bags -- with the result that Baidu's annual revenues could leap 30% to 40% this year. And Deutsche Bank: Google's threat "benefits Baidu.com under almost all scenarios."
"Evil" triumphs
As you can quickly discern from a glance at each analyst's "record" on CAPS, these are three of the smartest bankers in stockpicking, each ranking in the top 20% of investors we track. And you know what? They're probably right this time as well. Google's threat probably does make Baidu a "buy."
Why? Well, basically, I see three ways that this showdown can play out: First and most obviously, Google can do what it's threatened to do. It's demanded free rein on its business in China. When China doesn't give it, Google walks. End of story. Game, set, and match -- Baidu. Alternatively, Google can cave, admit it was bluffing, find some face-saving means of coming to an amicable agreement with the Chinese, and continue business as usual (or the Chinese variant thereof).
There is, of course, the third option: Victory for Google. China could cave. The government could admit it was wrong all along about censoring Internet access for its citizens, pledge to refrain from Internet hacking, and turn its vast resources to worthy endeavours like finding "forever homes" for stray kittens, and developing a perpetual rainbow machine. Yeah, and monkeys might fly out of my ...
But I digress.
Check your rainbows at the door
The most likely scenario is, of course, the first one: Google makes its play. Yahoo! (NASDAQ:YHOO), frightened of seeing its stake in Alibaba.com jeopardized, refuses to join in. Baidu and other Chinese players see no upside in joining Google's crusade for truth, justice, and the American way -- in China. And so they, too, keep mum.
Result: China gives Google's ultimatum the cold shoulder, and Google walks.
The sad fact of the matter is, as much as we'd all love to see "Good" triumph over "Evil" in this contest, as a matter of international law, China looks well within its rights in insisting that foreign companies, operating within its borders, play by whatever rules it sets. Recent history is replete with analogous examples: France imposing fines on Amazon.com (NASDAQ:AMZN) for offering free shipping to customers within its borders (to the detriment of local retailers.) The European Commission declaring the marketing practices of multiple U.S. businesses verboten within EU borders, as Coca-Cola (NYSE:KO), Microsoft (NASDAQ:MSFT), and Intel (NASDAQ:INTC) are all brought quickly and successively to heel.
Foolish takeaway
With precedent on its side, and Baidu standing ready to pick up any Internet search-slack that Google's departure might create, China simply does not need Google. It's got no reason to admit it done wrong, beg Google's forgiveness, and agree to the company's demands.
And so Google will retire gracefully from the fight, holding the moral high ground, but ceding the field of battle -- and hundreds of millions in Internet search revenues -- to Baidu.
