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Overbought Doesn’t Mean a Thing for the Right Tech Stocks

Apple, Google and Baidu all still have upside potential right now

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Another “tech” stock that is not part of the Nasdaq 100 is Baidu (NASDAQ:BIDU). Despite an 88.3% surge in earnings for full-year 2011, Baidu’s ADRs advanced only 28.4% in 2011. There were plenty of headwinds during the year, none of which seemed to have affected the company’s dominant search franchise in China. The only other more extreme dichotomy in recent memory is 2008, when Baidu’s EPS surged from $18.11 (pre-split) at the end of 2007 to $30.19 at the end of 2008, yet the shares declined.

It seems like a huge strategic mistake on behalf of Google to pull out of the mainland Chinese market, as last quarter Baidu accounted for 78.3% of China’s search-engine market by revenue, rising from 78.2% in the previous three months. Google’s share dropped to 16.7% from 17.2%. This market share shrinkage by almost half for Google started after its decision to no longer comply with censorship laws since January 2010, in effect giving up its chance to effectively compete with Baidu in the world’s largest Internet market. It is difficult to estimate how low Google’s share can go, but this likely is a strategic mistake it will regret some day.

The average revenue per user in China is much lower for mobile customers because smartphones still are viewed as a luxury. As smartphone penetration grows, in addition to overall low Internet usage penetration, Baidu is likely to keep growing much faster than Google with much less competition. The shares are not overly expensive at 21.2 times forward earnings, which given the expected growth give credibility to the argument that they are cheaper than Google’s (accounting for its projected EPS growth rate).

For 2012, consensus estimates call for sales and EPS to increase 55.6% and 53.6%, respectively — Baidu still is in its hyper-growth stage. Growth is likely to slow due to the law of large numbers — just like it did with Google — but given the size of the Chinese market, it is unlikely to happen for a couple of years. China’s Internet penetration rate is only 31.6%, while in the U.S. the number is 77.3%.

For buy-and-hold investors in the right technology stocks, “overbought” at present is not an issue.

Ivan Martchev is a research consultant with institutional money manager Navellier and Associates. The opinions expressed are his own. Navellier & Associates holds positions in Baidu and Apple for its clients. This is neither a recommendation to buy nor sell the stocks mentioned in this article. Investors should consult their financial adviser prior to making any decision to buy or sell the above mentioned securities.

Article printed from InvestorPlace Media,

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