1 Internet Stock That Won't Fall, 1 That Will
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 interested in buying search companies, you need to consider just how dynamic it is. While it looks like companies like Google and Baidu are destined to remain market leaders into the foreseeable future, the emergence of social networking and music engines in China may upset the status quo more than what the myopic market recognized. Are companies taking the right steps to address this dynamic market? Below, I review several companies with this question in mind.
Baidu (NASDAQ: BIDU): Acquisition Strategy & Why It Won't Fall
The biggest Chinese search engine company Baidu is currently struggling to maintain its throne position with 30% underperformance to the S&P 500 in 2012 The main reason for this big decline is Qihoo 360’s (NYSE: QIHU) decision to swap its search engine options of Baidu and Google to its own. Now Qihoo holds 10% of the Chinese search engine market, which appears dwarfed by Baidu's 80% take. But it is just the nature of a company so quickly gaining market share that sends jitters down my spine.
Still, several analysts are speculating that 2013 will be a come-back year for Baidu in light of rapidly growing Internet population. The company also has a major opportunity to expand and create value through takeovers. The latest target? Sina’s (NASDAQ: SINA) Weibo.com service--the Chinese Twitter and Facebook. While I believe it could add meaningful synergies, the acquisition as a whole is risky, since not too long ago, even Sina's Chairman had to admit that WeChat's rapid growth was chipping away at Weibo's business despite being 400 million members strong. While Sina is ultimately losing business while Baidu is making money and rapidly growing as the domestic market leader, a takeover would detract from the momentum. I am therefore strongly surprised that Credit Suisse issued a report saying that all or some of Sina was in Baidu's crosshairs. Other possible acquisitions include Kingsoft and UCWeb, but no official news on this has been given.
Ultimately, I see Baidu's main investment appeal as a high growth company trading below Google's (NASDAQ: GOOG) multiples. Despite having quadruple the average EPS growth rate that Google did during the past 5 years and quintuple for projected 2012, Baidu trades at a PE multiple that is only 10% higher than Google's. China's 1 billion population only has 40% Internet access versus 78% in the 310 million US population. Accordingly, I see much lower downside for Baidu than what market commentators have suggested.
Yahoo (NASDAQ: YHOO): Why It Has Fallen & Will Again
The once popular Internet company is now overshadowed by its competitors and is struggling with an array of new CEOs. In mid-2012, Yahoo employed the ex-Google Marissa Mayer who recently made changes in the company--first, she released the Flickr app, which outperformed Facebook’s Instagram by far with its usability and features. Mayer is now trying to return the company back to where it was with reinventing the company’s core businesses. Yahoo Mail’s recent change, for an instance, supposedly increased its standing in the market as a direct competitor to Gmail.
The future of Yahoo by Mayer is ultimately in product offering and mobile. And this will be accomplished through partnerships with other well-known companies. So far, these partnerships have been nothing but rumors and, in my view, hot air. The rumor about the company partnering with Facebook is becoming increasingly unbelievable, especially since the social network already released its social search engine "Graph" and partnered with Microsoft's Bing. It didn't have the best of welcoming.
And results beyond largely cosmetic changes have been overshadowed by actual data results: Yahoo’s real problem. I'm referring to y-o-y decline in users in all of its businesses as users. The figures are -33%, -28%, and -24% in October, November, and December, respectively. Sure, the company may be monetizing its existing users more, but if your base of customers continue to go to your competitors, the long-term isn't bright. And now the stock has run up 40% to the 52-week high and now trades at 17.4x forward earnings, I believe its time to look elsewhere.
TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool recommends Baidu, Google, and SINA . 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. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.