There is a Chinese company out there just like Google Inc (NASDAQ:GOOG), and it’s growing at a faster rate. Right now Google Inc (NASDAQ:GOOG) controls 65.2% of the global internet search market (by number of searches, according to comScore), effectively dominating the market. But in China, Google hasn’t been able to make inroads for numerous reasons, and Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is one of them.
Baidu controlled 78.3% of the Chinese search engine market (according to Analysys International) in the fourth quarter of 2012, up 0.1% from Q3. Baidu’s enormous market share tells us why it’s called the “Google of China.” Clearly Baidu, which has been growing like a weed, could make you rich.
Growth
Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s global market share was at 5.3% in 2007, but it has since grown to 8.2% as of December 2012. This is because the number of searches in China dropped 5.9 billion in 2007 to 18.6 billion in 2012.
In China, about 513 million people have Internet access, up from 59.1 million in 2002. This growth has plenty of room to continue, as China has 800 million more citizens yet to gain access to the Internet. This opportunity will push the number of searches conducted in China higher, and thus Baidu’s stock price will increase as it rakes in more cash. If China sees 20% growth in Internet penetration, then that will lead to another 100 million Internet users.
According to estimates another 100 million users would increase the number of Internet searches by 3.8 billion, which would be 21.5% growth year-over-year. For Baidu.com, Inc. (ADR) (NASDAQ:BIDU) to continue its massive growth, all it must do is sit back and watch the market grow. And with Baidu’s market share, most of those searches will be done on its engine. As Baidu processes more searches, it makes more money as companies will pay for more its pay-for-placement and advertising services.
Fundamentals
Baidu is expected to grow its EPS by 25.5% in 2013 and 30% over the next few years. This growth would merit a PE of 20 to 30, but lucky for you, Baidu has a PE (TTM) of 17.6. If you look at Baidu’s forward PE, it’s only 12.5. Baidu looks very cheap, and has plenty of cash on hand.
As of its latest quarter, Baidu had $5.2 billion in cash on hand and approximately $1.6 billion in long-term debt. From a valuation perspective, Baidu is very cheap with a rock-solid balance sheet.
Competition
Google Inc (NASDAQ:GOOG) had a peak market share of 35.6% in 2009 in China’s search-engine market, right before moving its operations to Hong Kong due to censorship concerns. When Google Inc (NASDAQ:GOOG) moved to Hong Kong, it didn’t have to comply with the same censorship rules that the Great Firewall of China had set up.
This led China to ban Google from Mainland China, which led to Google Inc (NASDAQ:GOOG)’s massive market share loss. Baidu was able to pick up that market share, as it had only 58.4% of the market back in 2009.
Another player Baidu has to watch out for is Qihoo 360 Technology Co Ltd (NYSE:QIHU), which has been rapidly eating up market share in China and now has around 10% of the Chinese market. It only launched in August 2012, and already is one of the biggest search engines in China.
Qihoo 360 Technology Co Ltd (NYSE:QIHU) also has the advantage of being a native company to China. It will be able to respond to consumer wants easier than Google and will have similar connections to the government as Baidu. Since Qihoo released its new search engine, its stock has gone from $15 to more than $30 per share.
In the long run, Qihoo 360 Technology Co Ltd (NYSE:QIHU) will benefit from the growing amount of Internet users who will both use their search engine and buy their internet security software. Internet security is the base of Qihoo’s business model, and the company was doing alright before the search engine release.
Qihoo is priced for strong growth. so I would look for a pullback before buying in unless you are extremely bullish. With a forward PE of 18, if it hits those estimates then Qihoo will be relatively cheap for a growth stock.
Google, which is slated to grow its EPS by 17.5% this year and 14.5% over the next few years, trades at a PE of 23.8. That is a significant premium to Baidu, even though Baidu is growing faster than Google Inc (NASDAQ:GOOG). This leads me to believe Baidu is undervalued.
Final thoughts
Baidu has a lot going for it; it has a solid balance sheet, is growing very fast in a fast-growing market with a long runway, trades at a cheap PE relative to the market and to its peers, and is trading by its 52-week low. Baidu will at least hold or continue to gain market share in China, as it keeps taking away searches from Google.
China’s government doesn’t like Google Inc (NASDAQ:GOOG), and wants to keep Google out of its country. This protectionism will benefit Baidu, providing it a shield most companies don’t get to wield. I’m bullish on Baidu.
Callum Turcan has a position in Baidu. The Motley Fool recommends Baidu and Google. The Motley Fool owns shares of Baidu and Google.
