Google (GOOG) may be “the” search name in the Western half of the globe, but things are remarkably different in the eastern hemisphere. In Asia — and Eastern Asia in particular — search engines like Sogou, Qihoo and Naver are the go-to names that web surfers have bookmarked. Of all the names an investor may want to consider as an alternative to an aging Google trade, however, it’s Baidu.com (BIDU) that tops the list.
Baidu dominates China’s web search market the way Google dominates North America’s, controlling more than 70% of that arena most of the time. The two companies aren’t carbon copies of one another, though … and investors couldn’t be more thrilled about having some variety on the menu. The question is, which one’s the better bet right now?
A Tale of Two Search Giants
If the recent relative action from the two stocks is any indication, then Baidu is the name traders are betting on — big-time. The stock’s rallied from $94.60 at the end of June to the current price around $131.00. That’s a 38% pop, compared to practically no progress at all for Google shares in July.
The prod for the run-up was twofold, kicking off with news of a key acquisition, and followed up later in the month with solid earnings news.
On July 16, Baidu let investors know it was spending $1.9 billion to buy a fully controlling interest in app store 91 Wireless. 91 is no slouch — since getting into the app-download business in 2007, the company’s served up 10 billion downloads. The word is, the cost of the acquisition is 40 times 91 Wireless’ 2012 revenue. It’s not exactly a bargain, but given the accelerating land grab for web-properties in China, Baidu certainly could have done worse. The market sure loved it anyway.
Just a few days later, Baidu reported a great Q2. Revenue was up 39% on a year-over-year basis, and operating per-share profits of $1.22 just topped estimates of $1.21, even if down a couple of cents from Q2 of 2012.
The clincher, however, was when Baidu.com upped its current-quarter revenue estimate to the tune of around 6.0% higher than previous outlooks. The company’s mobile-driven revenue is starting to roll much better than it has been.
As for Google, well, it didn’t have the best second quarter. Per-share earnings fell from $10.12 a year earlier to $9.56. The market didn’t see the shortfall coming, either — the pros were looking for $10.78. The earnings dip came in spite of the 19% improvement in revenue.
Based strictly on recent events, the knee-jerk decision would be for a newcomer to choose Baidu.com rather than Google. That wouldn’t be the right move, however.
Google Still Rules All
Never mind the fact that BIDU shares are overbought; that condition can be negated by time and patience for traders willing to wait for a safer entry point. No, even if Baidu shares were to cool off and regroup, GOOG would still be the stronger play.
That’s not a chic, hip stance right now. China’s foray into the internet era as well as the smartphone era is still accelerating, while the rise of smart devices in United States is slowing. For reference, there are an estimated 246 million web-connected devices in China, a country with a population of more than 1.1 billion. Conversely, 221 million smartphones and tablets are in use in the United States compared to a population of 300 million. The numbers suggest Baidu has the bigger and better opportunity to tap into, especially now that it’s turning the heat up on mobile revenue venues.
But Google still has the relative edge.
For the record, while Baidu is still the top name in Chinese search engines, young up-and-comer Qihoo took a huge bite out of Baidu’s dominance in that arena over the past 12 months. As of June 2012, Baidu.com fielded 81% of China’s web searches, versus none for Qihoo. A year later, however, Qihoo is the search engine of choice for 15% of China’s web surfers, and Baidu only owns 69% of the search market now. Google has fended off its search competition with much greater success.
That being said, there’s little doubt that the new battleground will be on the mobile front (mobile device search and advertising), and Baidu is building a huge weapons cache for that war. Google’s is still better, however, and Google’s leadership on the mobile front is much more experienced.
See, not only does Google own the key mobile search site, it also owns the key platform making those devices work — Android. While Google’s app store is still playing second fiddle to the Apple (AAPL) app store, it’s catching up with Apple’s dominance. The acquisition of 91 Wireless will certainly give Baidu a meaningful app store of its own, but Google and Apple are still the ultimate gatekeepers in that arena, as they manufacture the operating systems for the mobile devices most Chinese consumers use to access the internet.
Google is making a small dent in the hardware market too, via its Nexus line, and more recently, a web-to-TV technology called ChromeCast (which is a direct shot at AppleTV, Roku and other web-to-TV devices). While the end-purpose of Google Glass is still unclear, there’s little doubt that the company will be able to monetize it.
There’s no Baidu hardware anywhere on the radar.
Yes, Google’s bread-and-butter ad business slipped last quarter. But Google’s concept of integrating itself into every facet of your life is not only well-conceived (even if a tad creepy), the company’s making consistent progress to that end — the ad revenue will come. While Baidu’s certainly doing a lot of things right, it’s buying its growth, and it may be years before it integrates itself into the all-encompassing tech company that Google is in the western hemisphere.
James Brumley does not have a position in any of the aforementioned securities.