Invest in the Right Global Search Business

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

If you are one of the many investors disappointed in not getting into Internet media stocks at the right time, now may be your opportunity. There are a plethora of opportunities arising from emerging markets and mobile. I encourage backing search companies that have shown more than just peripheral changes in strategy. Moreover, I specifically recommend avoiding those that have risen without strong underlying growth. Below, I review my outlook on a few key players in the search business.

A Look At Baidu.com (NASDAQ: BIDU)

Baidu is China's leading search engine and, as such, is exposed to obviously significant content restrictions. However, the company is doing what it can to create and build value. It recently decided to parter with the emerging market's #2 leading smartphone vendor, Lenovo, to distribute the LePhone A586. This $158 phone runs on Baidu's Android-based mobile operating system and feature a 4.5 inch display and powerful chips. Android has just more than three-quarters of the urban Chinese market, so I have little doubt that this initiative will help the company penetrate the mobile search market. There 583 million Internet users and 270 million smartphone subscribers in China. With mobile data now representing 13% of Internet traffic and mobile ad revenue forecasted to grow 27% to $19 billion next year, the market potential is huge.

I also believe that the market has overblown the "headwind" coming from competitor Qihoo (NYSE: QIHU). Qihoo operates a web search engine and recently decided to produce a music search engine--an innovative concept that some expect will replace Sohu's platform. However, Baidu already has China's leading music engine, which was so successful that it even drove giant Google out of the market. Baidu has 73% of the Chinese search market, which dwarfs Qihoo's 9.6% stake. Qihoo's CEO is nevertheless endeavoring to take between 15% and 20% of the market and has hired several ex-Google employees to achieve just that.

A more significant threat comes from UCWeb, a Chinese mobile browser developer, that has over 100 million Android users and is the most popular smartphone platform. Though Baidu is offered as a search option, UCWeb allows for many other search engines. That said, the company can always buyout the company and stop the threat. And with the company near a 52-week low after falling 40.5% from the high, the stock looks incredibly cheap at a PEG ratio of less than 0.5x and forecasted growth rate of 41.9%. It should not be surprising then that some of the price targets on the Street include the following: $140, $157, $165, $185, $190, and $200. The stock is currently worth only $91.75.

Why You Should Not Buy Yahoo! (NASDAQ: YHOO)

It is humorous then that anyone would consider investing in Yahoo!, the laggard search business in the United States. Despite a much needed management turnover, the company recently achieved a 52-week high that is only 35.4% above the low. This, however, won't stop the PR machine from making investors think the company can make a game changer. Just this Monday, the company's new COO  was said to be planning a "big overhaul" of the ad sales model. Yahoo! sales rep would previous by split up along region and ad type; now, they will be split along industry, which is what Google does. While it is a nice change, it should catalyze only a nominal improvement in free cash flow per share. That, however, didn't stop shares from rising 1.2% for the day of the announcement--outperforming Google.

There are several other factors to consider about Yahoo!. Its partnership with NBC Sports  to cross-promote one another's content leverages the company's strong Yahoo! Sports brand. Actions like this is keeping the Street optimistic. Bernstein, for example, believes the company's investments in mobile and social could be the driving force in getting shares above $25. However, Bing has done the same thing in regard to making significant social media partnerships and has ended up with a nine-figure loss in the process. Thus, the only thing that I see going for Yahoo! is improving revenue per search and the complementary cost reductions. However, at such a higher FY13 earnings multiple, one wonders if this upside has been factored into the stock price.


TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu. Motley Fool newsletter services recommend Baidu. 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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