It is quite interesting to see investors project the future stock prices based solely on past prices. Of course, we might have some reasons to support target price that we already set for the stock in their minds. When Apple Inc. (NASDAQ:AAPL) reached $700 per share, many people projected that it would reach $1,000 soon. When Apple dropped to $500 per share, investors thought it might drop much further to $300. Similarly, now that Google Inc (NASDAQ:GOOG) trades for $800 per share, many are speculating that it could easily reach $1,000.
Google and Baidu.com, Inc. (ADR) (NASDAQ:BIDU)
Google Inc (NASDAQ:GOOG) is still considered the most dominant search engine in the world. According to comScore, Google Inc (NASDAQ:GOOG) increased its search market share from 66.7% in December 2012 to 67% in January 2013. The second leading search entity was Microsoft, with a 16.5% market share. However, Google is not a leading search player in the world’s biggest market: China. Instead, the market leading search engine in China is Baidu.com. In the fourth quarter of 2012, Baidu’s market share in China was 78.3%, while the market share of Google stayed at only 16.7%. In the past six years, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has experienced significant growth in both its top line and bottom line. Its revenue has grown from $280 million in 2007 to $3.58 billion in 2012. Its net income has also followed the rising trend, from $100 million to $1.67 billion in the same period.
With the Similar Valuation, but Baidu is More Profitable
At the current price of $89.73 per share, Baidu is worth nearly $31.4 billion on the market. The company is valued at nearly 13.9x EV/EBITDA. Google Inc (NASDAQ:GOOG), on the other hand, is a much larger company with a $260.5 billion market cap. At the current trading price of $790.13 per share, Google is valued a bit cheaper, at 13.5x EV/EBITDA. Interestingly, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) seems to have a much more profitable operation than Google. Over the past 12 months, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) generated more than 49.5% operating margin, while the operating margin of Google was only 27%. Baidu’s return on invested capital was more than 47%, whereas the ROIC of Google was only 15.3%.
Google – The More Innovative Company
However, Baidu has its advantages over Google in the Chinese market mainly due to Chinese regulations. Google is definitely a much more innovative company with a wider moat. Charlie Munger talked about Google’s moat a few years ago: “Google has a huge new moat. In fact I’ve probably never seen such a wide moat. I don’t know how to take it away from them. Their moat is filled with sharks.” In addition, Google employed little debt in its operation. As of December 2012, it had $71.5 billion in total stockholders’ equity, $6.2 billion in short and long-term debt, and more than $48 billion in cash. Its cash on hand accounted for more than 18.4% of Google’s total market cap. Meanwhile, $5.21 billion in cash and short-term investments represented only 16.6% of Baidu’s total market cap.