Is Baidu a Better Investment Than Google?

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

I have stumbled upon an interesting article regarding the prospects of investing in Baidu (NASDAQ: BIDU) – the leading search engine in China. This article considered several financial ratios and compared the company to its leading competitors such as Google (NASDAQ: GOOG). I wish to further explore the comparison between these two search engine giants. I will argue that Google still seems to be a more attractive investment than Baidu.   

China – Risk and Opportunity

China's economy is progressing by a much faster pace than developed countries and this will reflect in the growth in computer usage, interest usage, etc. This is one of the most appealing factors to directly invest in China. The peril, however, is the regulatory changes in China on the freedom of use in the Internet. These points were made in the article mentioned above.

In regards to the Chinese Internet market, Baidu's market share is very high (nearly 80%), which could suggest that the company's strong hold is likely to only go in one direction – down (due to competition). Even if the company will keep its high market share, it hasn't shown any signs of expanding beyond China or Japan. This could limit the company's growth by the development in China's economy. Since Google also has a stand in the Chinese market, the competition between the two could cut Baidu's market share in the future.

But besides market share, one important factor worth considering is the potential growth in revenues. For these companies, this mostly means advertising.

Advertising Revenues

Baidu's growth in revenues might continue, but its RPM (revenue per thousand page views) in China will remain much lower than that of developed countries such as the U.S and U.K, where Google operates.

According to a report, which ranks countries by their RPM (based on Google Adsense), the U.S is ranked number three while China is ranked only number 65. This means, Baidu's RPM is likely to be much lower than that of Google's or Facebook's (NASDAQ: FB) – another company who sees most of its revenues from advertising. For Facebook, much like Google, the U.S is ranked at number 5 in its average CPC (cost per click) while China is only number 64.

Despite the wide gaps in the RPM /CPC between China and the U.S, the operating profitability of Baidu is slightly higher than that of Google's or Facebook: During recent quarters,  Baidu's operating margin is nearly 50% while Google's is between 20% and 30%. One factor that contributed to Google's lower profit margin is its higher R&D provision. In 2011-2012, Google's R&D as a percent of its revenues is around 12-14% while Baidu's is around 9%-10%.

This could suggest Google's potential growth from research and development might be higher than that of Baidu's. Nonetheless, Baidu's growth in revenues was higher than Google's: as of the third quarter, Baidu's revenues grew by almost 50% compared to the same quarter in 2011. In comparison, Google's growth in revenues was slightly lower at nearly 45%.  So even though Baidu is working mostly in China, its growth in revenues wasn't much higher than Google's.

Despite Baidu's high growth in revenues, the company's stock fell by 13.9% during 2012. Google's stock rose by 9.5% while the NASDAQ increased by 13.4%. This means, none of these companies have performed well during last year, but at least Google's stock was the closest to the market index. 

New Horizons

Google, even more than Baidu, is expanding its business beyond its search engine including (among other): the Android operating system for tablets and Smart-phones, Nexus tablet and Smart-phone, and providing ads to other websites (Adsense). Google might also collaborate with Qihoo 360 (NYSE: QIHU) – another major player in China's Internet market. In this partnership Google will help monetize Qihoo's site so.com. If this collaboration will become a reality, this could expand Google's foothold in the Chinese market.   

The company also plans to expand its operations to other realms including the highly anticipated Google Goggles that is expected to come out next year. All of these products are related to Google's core business – search engine. At the same time, these operations are well spread out so that they offer some potential growth in revenues and reduce the company's risk in relying only on its core business.

Nonetheless, Google critics suggest the company's unclear direction is spreading out the company's resources thin.

In terms of financial risk all of the above companies are relatively considered low risk: Google, much like Facebook and Baidu, has a low equity-to-debt ratio: Google's ratio is 0.09, Baidu's 0.1, and Facebook's 0.06. Therefore, in terms of financial risk, all of these companies seem to be in the same ballpark.

The Bottom Line

I think it might be early to start moving towards Baidu. If you still want a foothold in the online advertising business and a Chinese market I still believe Google will be your best bet, at least among the above-mentioned companies. 

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liorc has no position in any stocks mentioned. The Motley Fool recommends Baidu, Facebook, and Google. The Motley Fool owns shares of Baidu, Facebook, and Google. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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