Which Search Engine Should Investors Buy?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In these modern days, we cannot live without searches. It is like an encyclopedia of the old times. It makes the world smaller and brings people closer to one another. And where do we go when we want to search for information? I think the majority of us will answer: Google (NASDAQ: GOOG).

In fact, Charlie Munger once opined that Google had a moat, which is filled with sharks, and he didn’t know how to take it away from Google. But some might argue that Google is not a single player in a big search market. That is true, as there are several competitors of Google in the search area, including Baidu.com (NASDAQ: BIDU), Yahoo! (NASDAQ: YHOO), and Bing of Microsoft (NASDAQ: MSFT). But what is the best one for users and for investors?

Google’s Story

Google’s story began from the time when Larry Page and Sergey Brin met each other at Stanford in 1995, creating the initial search engine named BackRub. It analyzed the “back links” pointing to a given website. In 1998, the two guys tried to sell their PageRank technology, but nobody was interested in buying it. The game really started when it received $100,000 in seed funding, and $25 million capital infusion from Sequoia Capital and Kleiner, Perkins, Caufield, & Byers one year later.  In 1999, Google was selected by AOL (NYSE: AOL) to be its search partner, and by Yahoo to be its default search technology provider for US sites. Only 4 years later, in 2004, that Yahoo-Google search marriage fell apart. It was a very smart move for Google to incorporate its search technology in giants’ shoulders during that time. After it went public, Google made a series of investments to expand its phenomenon, including $1 billion for 5% AOL’s stake, $1 billion to Dell for 3 years toolbar distribution, and $1.65 billion to acquire YouTube.

Less efficient technically?

Technically speaking, in 2011, Google is known to be less efficient than Bing and Yahoo Search. Experian Hitwise mentioned that Yahoo Search and Bing had a much higher success rate than Google.

<img src="/media/images/user_14219/screen-shot-2012-10-23-at-112716-am_large.png" />

Market share

Following ComScore’s recent September 2012 ranking, with a total 16.3 billion explicit core search in September, Google has the biggest market share in the US, with 10.9 billion searches, accounting for 66.7% of total US market. Microsoft Sites and Yahoo Sites are only 15.9% and 12.8% respectively. 

<img src="/media/images/user_14219/screen-shot-2012-10-23-at-113116-am_large.png" />

That is the data for the US market, but in the biggest market of the world, China, Baidu has been taking the lead. Baidu has around 80% the search market share in China. However, globally, Google is still the market leader, with a 86% market share, whereas Baidu is only 2%. Yahoo has the second place of 7%. 

<img src="/media/images/user_14219/screen-shot-2012-10-23-at-121120-pm_large.png" />

Source: Netmarketshare.com

My Foolish Take

So which search engines investors should buy? Either Yahoo or Google or Baidu? 

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>GOOG</strong></p> </td> <td> <p><strong>BIDU</strong></p> </td> <td> <p><strong>YHOO</strong></p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>20</p> </td> <td> <p>29</p> </td> <td> <p>17.7</p> </td> </tr> <tr> <td> <p><strong>P/B</strong></p> </td> <td> <p>3.4</p> </td> <td> <p>12.4</p> </td> <td> <p>1.5</p> </td> </tr> <tr> <td> <p><strong>P/CF</strong></p> </td> <td> <p>14.1</p> </td> <td> <p>30.4</p> </td> <td> <p>14.3</p> </td> </tr> </tbody> </table>

We can see that Baidu is the most expensive company among the three. The high valuation might be due to the factor of growth. Google seems to be the most exciting with its P/E much lower than that of Baidu, and its P/CF is comparable to Yahoo’s.  Personally, I think with a 86% market share globally, Google is still the best stock in the search industry for long-term investors. 

Look Further

Regardless of your short-term view on the Chinese economy, there may be opportunity in Baidu (aka the "Chinese Google"). The Fool’s brand new premium report breaks down the dominant Chinese search provider's strengths and weaknesses. Just click here to access it now.

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu, Google, and Microsoft. Motley Fool newsletter services recommend Baidu, Google, Microsoft, and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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