Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has made a recent comeback with a strong market rally. Its share price increased from more than $89 per share in the beginning of July to nearly $127.60 per share, marking an incredible gain of more than 43% within just one month. Moreover, Morgan Stanley upgraded the stock from Equal Weight to Overweight. Should we listen to Morgan Stanley’s upgrade? Is Baidu.com, Inc. (ADR) (NASDAQ:BIDU) a good buy now? Let’s dig deeper.
Second-quarter operating results
What investors might focus on in Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s operating results is its growth in mobile monetization. The company reported it had around 58,000 online active customers, and for the first time, its mobile revenue accounted for more than 10% of the total revenue.
Looking forward to the third quarter 2013, Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s revenue is expected to be in the range of $1.4 billion to $1.5 billion, representing huge growth at 39.7% to 43.3% compared to the third quarter last year. Morgan Stanley estimates that Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s operating margin will remain under pressure because of higher marketing spending. However, Morgan Stanley believes that Baidu will “enjoy operating leverage in 2014, with sales re-acceleration.”
Still the leader in the Chinese search market
Baidu has been the main beneficiary of Chinese Internet regulation, which keeps Google Inc (NASDAQ:GOOG) from operating in the country, the largest market in the world. Baidu is the leader in the Chinese search market, with the dominating 67.5% market share. Google Inc (NASDAQ:GOOG) stays in the third place with only 3.3% market share.
Actually the market shares of both Baidu and Google has dropped in the past year, due to the rise of Qihoo 360 Technology Co Ltd (NYSE:QIHU), which quickly gained nearly 15.2% of the Chinese search market share within just several months.
The quick market-share gain was due to the fact that Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s web portal and browser switched its default search engine from both Google and Baidu to its own search services, seizing many accidental users overnight. However, as there is not much Baidu traffic coming from Qihoo, and Baidu’s market share is still much larger than Qihoo, there is still a lot of potential future growth for Baidu.
Go mobile
Google is the wonderful business model for Chinese Internet companies. It is not only the leader in the search market, but also the leader in mobile, with its Android operating system. Google Android currently has around 75% of the total smartphone market and more than 56% of the tablet market globally. Google Android is also the leader in China, accounting for 90% of all mobile operating systems. However, Google Play is not available in China.
To take that opportunity, Baidu has recently agreed to acquire 91 Wireless Websoft, China’s second-largest mobile-app distributor, for as much as $1.9 billion. With the acquisition, Baidu has around 15.6% market share in China’s app-distribution market, directly competing with the largest player Qihoo, which owns around 27.4% of the market. With Baidu’s entrance, Qihoo will face great competition from Baidu in the mobile-app market, which could threaten its current market-leading position.
Valuation-wise, Google is still the cheapest valued among the three tech companies. At $885.30 per share, it is worth $294.9 billion in market cap. The market values Google at 14.8 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). Baidu has a bit higher valuation. It is trading at $127.50 per share, with the total market cap of $44.6 billion. The market values Baidu at about 17.3 times its trailing EBITDA. Qihoo is the most expensively valued of the trio. With a $7.4 billion market cap, Qihoo is valued at as much as 100 times its trailing EBITDA.
My Foolish take
Baidu, despite the aggressive competition from Qihoo and a higher valuation than Google, will still be a good long-term pick for technology investors because of its dominating, market-leading position and the recent strategic acquisition in the fast-growing mobile market in China, the largest market in the world.
Personally, I like Google the most due to its low valuation. Moreover, I think Google will deliver good returns for investors in the long run with its well-established global-leading positions in both the search and mobile markets.
The article Is Baidu a Buy at These Levels? originally appeared on Fool.com and is written by Anh Hoang.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Baidu and Google. The Motley Fool owns shares of Baidu and Google. Anh 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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