In addition to organic growth in its mobile segment, the company is also looking to increase its presence through acquisitions. The company’s revenues from mobile apps and games were not significant until the last quarter. On July 16, however, the company announced acquisition of 91 Wireless from NetDragon for $1.9 billion. Qihoo is currently the largest app store in China, but after the acquisition Baidu/91 Wireless will climb to no. one.
Baidu.com, Inc. (ADR) (NASDAQ:BIDU) can also benefit from this acquisition by directing traffic from 91 Wireless to promote its travel search (Qunar) and video (iQiyi) services. Baidu is currently trading at a forward price-to-earnings multiple of approximately 20 times. It has guided for a topline acceleration of 42% in the third quarter. I believe that a high-growth company like Baidu deserves a better multiple given that its mobile investments are finally bearing fruit and will continue to do so in the near future.
Standing still
One thing that Facebook and Baidu have in common is that they derive a substantial portion of their revenues from ad-based offerings. Their stocks corrected significantly last year when there were concerns about the monetization of ads on mobile. With this headwind now gone, their stocks are spiking. In contrast, LinkedIn Corp (NYSE:LNKD) didn’t see any stock price correction last year because its subscription offerings forms a major chunk of its revenues and can be readily monetized on mobile.
LinkedIn Corp (NYSE:LNKD) is one of the priciest Web 2.0 companies listed in the market, with a forward price-to-earnings multiple of approximately 100. Investors are pricing in a lot of positives from the company when they give it a market cap of approximately $22.5 billion. This gives the company very little margin of error. Some sell-side analysts even believe that LinkedIn will become a major media company in the business segment in addition to be a top recruiting service provider in the US and globally.
I believe that these expectations set the bar too high for LinkedIn and it is likely to disappoint investors in the medium term. Unlike Baidu and Facebook, it does not have a near-term catalyst in terms of mobile monetization that can take its stock higher.
Conclusion
To sum things up, successful monetization of mobile usage offers a good catalyst for Facebook and Baidu. This monetization will likely drive the companies’ stock prices higher in the medium term. I recommend buying both companies now to take advantage of this. LinkedIn lacks such a catalyst and is already priced to perfection. As a result, I believe it is prudent to avoid the company as of now.
The article Two Skyrocketing Internet Stocks to Buy, One to Avoid originally appeared on Fool.com and is written by Ash Sharma.
Ash Sharma has no position in any stocks mentioned. The Motley Fool recommends Baidu, Facebook, and LinkedIn. The Motley Fool owns shares of Baidu, Facebook, and LinkedIn. Ash is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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