Google Inc (GOOG): A Must Buy Search Stock

Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is the largest search engine in China and is also the largest Chinese technology firm listed on a US stock exchange. In a market where online companies are priced at very high multiples, BIDU is a reasonably cheap stock. Right now, the company is focusing on mobile monetization and cloud-based services.

Google Inc (NASDAQ:GOOG) has limited access to the Chinese market which provides room for growth in cloud-based services to BIDU. The company has beaten analyst estimates in the previous quarter and expects to maintain 50% YoY growth, for the next quarter as well. This growth is driven by high Revenue per Customer and an increase in the number of total customers. The valuations for this giant are still pretty reasonable and if investors have an appetite for the risks listed below, it’s an excellent long term bet.

Google Inc (NASDAQ:GOOG)

Company Profile

Baidu is China’s leading search engine with a market share of approximately 78.6% (Analysis International). The company has shown stellar performance over the last few years, as can be seen from the table below. The revenues have increased from $469 million to $2.3 billion in the last four years.

The company has continued its stellar performance into 2012, with last quarter revenues exceeding analyst expectations and reported at approximately $1 billion. The company will release its next quarter results on February 11 and it will be a catalyst for the stock price.



BIDU data by YCharts

Last Quarter

Baidu (BIDU) reported its 3rd quarter results on October 29. The market was expecting EPS of $1.28 and revenue of $ 0.998 billion dollars. The company beat estimates by reporting revenue of $0.99 billion and an EPS of $1.38. It also disclosed that it is focusing on its mobile monetization, to maximize benefit from ongoing transition from PC to mobile.

Y-o-Y

There was a 50% yoy increase in revenues and 48% yoy in operating profit. The net income for the quarter was $478 million, a significant increase of 60% yoy. According to company disclosures, this impressive growth was driven by improvement in monetization platforms and customer base.

Revenue growth

The revenue from online marketing was $993 million, an increase of approximately 50% YoY. This growth was partially driven by an increase in the total number of customers. Active online marketing customers increased to 390,000, a YoY increase of 28% and a QoQ increase of approximately 11%.

The second catalyst for growth in marketing revenue was the increase in Revenue per Customer. RPC for the period was $2546, a YoY increase of 17% and a QoQ increase of 3.2%. There was also an increase in Traffic Acquisition Cost (TAC) which increased to $86 million.

Selling, General and Administrative expenses were $102 million for the quarter, which is a 40% increase YoY. According to company disclosures, the primary driver of SG&A expenses was the increase in human resources, and increased marketing efforts. The focus on mobile monetization has increased R&D expenses by approximately 60% ($97.8 million for the current quarter).

This Quarter

BIDU will announce the results of its last financial quarter, on February 11. It expects revenue of $0.979-$1.01 billion in 4Q2012 i.e. YoY increase of 37.6% to 41.8%. Analysts are expecting revenue to be $998.94 million and EPS to be $1.29. The company has beaten analyst estimates in the last four quarters.

Competition

Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s emergence is currently the largest threat to Baidu. It is the biggest threat in terms of market share erosion. The company is focusing on providing its users new and innovative services. The search market newbie is hiring a lot of ex-Google executives, to wage war on Baidu’s market share.

QIHU has disclosed that it is trying to achieve a market share in the range of 15-20%. We believe it has still a long way to go, to pose a serious threat to Baidu. Some are saying that Qihoo search engine traffic is derivative because it is basically an aggregator of search results. This means that it provides different search engine options to users e.g. users can see Baidu and Google Inc (NASDAQ:GOOG) results on Qihoo website.

Conclusion

The ridiculously high valuations of internet-based companies (e.g. LNKD, AMZN) have made investors wary of another bubble in online stocks. Therefore, 19x Forward P/E valuation of BIDU is very cheap as compared to the industry and poses a lower risk for investors. The company expects growth in the range of 40-50% for the year, which makes it nothing short of a gold mine for investors.

BIDU has the largest market share (approx 80%) in China with Google Inc (NASDAQ:GOOG) and Qihoo way behind. This is a high-growth search market which is currently growing by more than 60% per year. For the time being, Baidu can be regarded as the king of the Chinese search because Qihoo market share is still significantly small, be an immediate threat to Baidu. If investors have a risk appetite for the threats listed below, Baidu is an excellent long term bet.

Threats

An investment in Baidu has the following risks.

  1. The biggest risk is Google’s reentry into the Chinese search engine market. It will have a catastrophic impact on Baidu’s stock price because right now Google Inc (NASDAQ:GOOG) has an extremely big brand name and it will steal away a major portion of Baidu’s Chinese market share.
  2. There have been reports that Chinese companies listed in the United States face the risk of being expelled from US exchanges, due to unsatisfactory implementation of US securities law.
  3. The RPS can slow down in the long run because of increased number of choices available to advertisers. This increase will reduce the pricing power available to Baidu and thus bring down profits.

The article A Must Buy Search Stock originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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