Searching for the King of Search

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As the saying goes, the Internet changed everything.  A vast abundance of researchable data became instantly available overnight.  People with a computer and an Internet connection became a finger-click away from an endless stream of information.  Indeed, the search industry that sprang from the World Wide Web led to some of the world’s most valuable companies.

In particular, there are three giants in the search industry that have created hundreds of billions in wealth.  These are Google (NASDAQ: GOOG), Baidu (NASDAQ: BIDU), and Yandex (NASDAQ: YNDX).  Each company dominates the search industry in their respective countries.  Now that we’re in the age of instant information, it’s worth digging further to find which, if any, of these kings of search are worthy of your investing dollars.

Google and the Googles of China and Russia

When the name of a company is both a noun and a verb, you know you’ve got a special company on your hands.  Instead of having to reference volumes of an encyclopedia to find more information about a subject, you can simply get on your computer and Google it.  In January, the company reported full-year 2012 results, and the markets loved what the company had to say.   Revenue soared more than 30% year over year, and has more than doubled since 2008. Diluted earnings per share clocked in at $32.31 per share. Google has a superb compound annual growth rate in earnings per share of 25% since 2008.

Google recently eclipsed the $800 per share mark for the first time in the company’s history, and the future seems bright.  Google’s dominance in the search industry is evident in the company’s $260 billion market capitalization.

You may not as easily recognize Baidu or Yandex as you would recognize Google, but their businesses are in the same vein.  Baidu is often referred to as the "Google of China."  The company was hit hard over the last year, falling from $150 per share to its current level of $90 per share. 

The market was especially concerned over the company’s most recent earnings report, even though the underlying numbers looked solid.  Total revenue increased 42% in the fourth quarter and 53% for 2012, year over year.  Furthermore, fiscal year 2012 net income increased 58% from 2011.

Unfortunately, even those kinds of growth rates weren’t enough to stop the stock from falling 10% on the day of the earnings announcement.  Interestingly, little in the earnings report implied that the company's growth is slowing down.  The company expects growth to continue, at least for the near future.  Baidu currently expects to generate total revenues ranging from $945 million to $975 million for the first quarter of 2013, representing a 38.1% to 42.6% year-over-year increase.

Yandex is the premier search firm in Russia.  Unfortunately, Yandex disappointed the markets when it revealed fourth-quarter net income below estimates.  Revenue grew 44% year over year, but the search engine said its revenue growth this year might slow to a range of 28% to 32%.  When a high-growth stock reports that growth will slow going forward, the market rarely views it positively.  Yandex shares trade at roughly the same price as they did a year ago.  Perhaps Yandex’s valuation scared off investors, as the stock trades for a trailing P/E over 30 times.

The Foolish bottom line

Google is certainly the Goliath of the search industry.  It carries a gigantic market value, and solid growth to back up its trailing P/E of 25.  Investors wary of allocating capital to Russian stocks may want to steer clear of Yandex, although its stock may have the most room to run, as it holds the smallest market capitalization of the three.

At these prices, Baidu looks to be the cheapest of the three, as it carries a trailing price-to-earnings ratio of just 18 times.  Despite reporting results that disappointed the markets, underlying growth remains strong and is expected to continue.  The harsh sell-off in Baidu shares seems overdone.  On the other end of the spectrum, Google continues to climb to new highs but still holds a relatively modest valuation.  Baidu and Google look to be the best bets among the search engines, based on higher growth rates and better valuations than Yandex.

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Baidu, Google, and Yandex. The Motley Fool owns shares of Baidu 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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