China’s Google
The best way to play Chinese internet growth is through China’s Google Inc (NASDAQ:GOOG), Baidu. In 2012, China’s internet population stood at 538 million. An estimated 75% of these users searched the internet using Baidu. By 2015, the number of internet users in China is expected to reach 800 million people. This is a huge opportunity for investors!
Baidu continues, in many ways, to operate from the Google Inc (NASDAQ:GOOG) playbook. Baidu.com, Inc. (ADR) (NASDAQ:BIDU) just announced that it would pay $370 million for the online video business of PPStream and merge it with its existing video platform, iQiyi. With this acquisition, Baidu will have its version of Google’s popular YouTube video service and China’s largest online video platform. Now, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) can incorporate its search advertising platform into these videos just like Google Inc (NASDAQ:GOOG) does with YouTube.
With the acquisition of PPStream, Baidu would be able to increase its mobile presence. Currently, 130 million devices are running its mobile app. Combine that with iQiyi’s 200 million mobile users and you have 330 million Chinese mobile customers, or the entire U.S. population, on Baidu’s network.
Baidu and Intel’s partnership
Baidu and Intel have partnered together for a joint innovation lab in China. Together they will create software for the Chinese mobile internet market. Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s developers will have access to mobile devices and PCs powered by Intel chips. Baidu will use this partnership to strengthen its mobile offerings and focus on cloud computing.
This is a strategic partnership for both companies. Intel will get a foothold in China with China’s leading search engine. Baidu will gain technological know-how from the world’s leading chip company. The partnership is a win-win for both companies.
Competition
Qihoo 360 Technology Co Ltd (NYSE:QIHU) is rapidly growing in the Chinese search space with 12.5% of the market, up from nothing in a short amount of time. Qihoo 360 Technology Co Ltd (NYSE:QIHU) is relying on Google to monetize its search engine while Baidu.com, Inc. (ADR) (NASDAQ:BIDU) monetizes its own. Qihoo 360 Technology Co Ltd (NYSE:QIHU) lacks Baidu’s presence in the mobile space and doesn’t have the online video presence like Baidu does now with its latest acquisition of PPStream.
Sohu.com Inc (NASDAQ:SOHU) owns the Sougou search engine in China. However, its Sougou search business only makes up 12% of its revenue. There has been speculation that Qihoo or Baidu.com, Inc. (ADR) (NASDAQ:BIDU) may make a bid for the Sougou search engine. However, integrating Sougou into either one’s search engine would not be an easy task. Sohu.com Inc (NASDAQ:SOHU)‘s main focus is its online portal, similar to Yahoo! Inc. (NASDAQ:YHOO)
Baidu’s fundamentals
Baidu has a current market cap of $32.57 billion. The stock trades at a forward P/E of 14.88 and has a PEG ratio less than 1 at 0.88. The company’s current operating margin is 46.52% and return on equity is 44.08%. On the balance sheet, there’s $5.39 billion in cash to $1.90 billion in debt.
Over the past year, the stock is down almost 25%. Of the analysts that follow the stock, six have it rated as a Strong Buy, nine a Buy, 10 a Hold, three an Underperform, and two a Sell. Price targets on the stock range from $75 to $180 with $107.50 as the median target.
Foolish assessment
In looking at Baidu’s U.S. competitor Google, we see that Google has a much larger market cap at $291.13 billion. Google also trades with a much higher forward P/E of 16.51 and its PEG ratio is greater than 1 at 1.27. Google has lower margins with an operating margin of 25.30% and return on equity of only 16.36%. Where Baidu.com, Inc. (ADR) (NASDAQ:BIDU)‘s stock is down over past year, Google’s stock price is up over 43%. Better margins and a discounted stock price make Baidu a better buy over Google.
The valuations for internet companies in China are indeed attractive and Baidu represents the best of the bunch. As Google has come to dominate the U.S. market, look for Baidu to do the same in China. With the stock down over 25% in the past year, this is a great dip for investors to buy for the long-term.
The article Now Is the Time to Buy This Internet Giant originally appeared on Fool.com and is written by Mark Yagalla.
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