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SINA Corp (SINA), Baidu.com, Inc. (ADR) (BIDU): These Internet Service Providers Have Upside Potential in China

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SINA Corp (NASDAQ:SINA)With a constantly and rapidly-growing internet and mobile user base, China presents internet services companies with plenty of growth opportunities going forward. Alongside increasing traffic, corporate advertising budgets are also rising quickly, and SINA Corp (NASDAQ:SINA), Baidu.com, Inc. (ADR) (NASDAQ:BIDU), and NetEase, Inc (ADR) (NASDAQ:NTES) are three companies that seem positioned to benefit from the expansion. For those looking for long-term investments, these companies most certainly deserve a close look.

SINA: Plenty of opportunities

SINA Corp (NASDAQ:SINA) is one of China’s first and largest internet services providers. It the leading online advertising platform in terms of revenue. Although this might seem as a problem at first sight, the fact is that corporate budgets for publicity have been and will continue to expand as the Chinese economy develops, thus providing plenty of upside opportunities. Moreover, the company’s strong brand name and “attractive user demographic (mostly well-educated, middle-class urban residents) should continue to draw advertisers” in the years to come (Morningstar).

One of the company’s most interesting business prospects is its Twitter-like microblog Weibo service. Although the web-page counts more than 500 million registered users, the active ones are the ones that matter, and bulk up to roughly 50 million people that spend an hour on the website every day. Only last year did SINA Corp (NASDAQ:SINA) start taking advantage of this opportunity and, after several quarters of bulky investments, monetized the portal through the use of display advertising and applications.

This will boost revenue in the upcoming quarters and will most likely be complemented by other revenue sources including e-commerce, online gaming, and online payments, among others. Consequently, analyst consensus estimates project an annual EPS growth rate of over 200% going forward.

SINA Corp (NASDAQ:SINA)’s most recently reported quarterly results beat consensus estimates comfortably and management raised its revenue guidance. As a result, shares surged and currently trade at 119 times its earnings, more than double the industry mean valuation. However, its price-to-book ratio of 3.4 versus the 4.1 industry average makes its valuation a little bit better looking.

Although a little expensive, I would still recommend buying and holding on to this stock; SINA Corp (NASDAQ:SINA) looks well positioned to benefit from growing advertising budgets, the advance of mobile technology, Weibo’s growth, and partnerships with firms like Baidu.com, Inc. (ADR) (NASDAQ:BIDU) and AutoNavi.

Baidu: The “Chinese Google”

Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is roughly 10 times bigger than SINA Corp (NASDAQ:SINA), holding a market capitalization of more than $33 billion. As China’s largest internet search platform — considered by many as the Chinese Google — this firm looks good for a long-term portfolio, especially as consensus estimates project an above average EPS growth rate of 20.16% per annum over the next five years. Trading at only 19.5 its earnings, compared to the 50.8x industry average, while presenting wide margins, returns and, growth rates, I’d say that this stock is undervalued and would strongly recommend buying and holding on to this firm’s shares.

Since the company controls over 70% of the total paid search sales in China, most of its revenue comes from them. Paid searches provide small and medium businesses with the opportunity to advertise their brands, while strongly contributing to Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s growth. Some other less profitable services, like music streaming and online forums, continue to drive traffic to the site, thus increasing value for advertisers and creating incentives for new customers to use Baidu.com, Inc. (ADR) (NASDAQ:BIDU)´s publicity services. Furthermore, a fast developing economy will result in higher corporate promotion budgets in the years to come and the company seems well positioned to make the most of this rising source of revenue.

Moreover, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has been diversifying its business, making an incursion in the mobile, real estate, travel, and cloud computing segments, among various others. Although paid searches are expected to continue to account for most of the firm’s income, these arising verticals — especially the mobile industry — should also contribute to revenue in the upcoming quarters. Even if Alibaba, Tencent, and Sohu present strong competitive threats, I believe that Baidu’s strong brand name and stable market dominance should assure profitability for a few more years, at least.
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