by James Brumley | February 19, 2014 9:45 am
Think Google (GOOG) is the dominant name in search engines all over the world? Think again.
While GOOG may be the top dog in North America and most of Europe, names like Yandex (YNDX) and Baidu (BIDU) are the proverbial kings of the hill in Russia and China, respectively.
Is there any chance either of these two search giants could have a stronger and more fruitful hold on their respective market than Google has on its market? Or more specifically, when all is said and done, is there any chance that YNDX stock or BIDU stock could be a better investment than GOOG stock?
Upcoming earnings announcements from Baidu and Yandex will help answer the question, but it’s not too soon to put either of the foreign search names under the microscope.
To start, we have to consider what are YNDX stock and BIDU stock up against when compared to GOOG stock. There’s not even a shred of doubt that Google is the yardstick when it comes to search success. The company has posted ten straight years of rising revenue, and ten straight years of rising earnings, sailing through a recession like it wasn’t even happening.
More of the same growth is projected through 2015, as GOOG taps into the still-growing smartphone and tablet arena while simultaneously cultivating a new television-delivery technology. Revenue is expected to grow around 17% in 2014, with per-share earnings projected to grow 18%.
That big growth doesn’t come without a price, however. Although the market is broadly tolerant of frothy valuations, GOOG stock is pushing its luck with a trailing P/E of almost 32 and a forward-looking P/E ratio of almost 20. The fact that Google will now have to post some of its competitors’ ads in the European market is only going to strain that already-frothy valuation even more.
Still, it’s Google … and Google’s worst day is still better than most companies’ best day. What are Yandex and Baidu going to do to impress investors?
As of the most recent look, Yandex owns 60% of the Russian web search market. As impressive as that is, it’s not as impressive as the fact that YNDX is also the world’s fourth-biggest search engine.
But isn’t Russia still an emerging market in terms of web usage? How’d the company get that big right in a market that’s not all that well-developed? How can YNDX stock perform with that kind of lethargic opportunity? The answer is a two-parter.
The first part of the answer is that Russia’s Internet market is more developed than most Western investors may believe. In a survey taken early last year, it was determined that 60% of the Russian Federation’s citizens (74.4 million users) use the web at least once a month, with 40% of those web users living in small towns where Internet access would be presumed difficult to get.
While a fair amount of that usage was to perform basic tasks like checking e-mail or working, 39% of Russia’s web users use the internet to watch movies or listen to music, while 37% of those browsers tap the Internet to socialize. Looks like — as is the case in the United States — the web is now finally a form of entertainment in Russia.
But that’s not all. The second part of the answer is that Yandex isn’t solely focusing on Russia. It’s also getting good traction in Turkey, with other nearby Cyrillic markets in its sights. Though the Cyrillic focus makes it tough for Yandex to compete in markets where search queries are typed Roman-based alphabet characters, that’s also why other search engines have a tough time competing with Yandex where the Cyrillic alphabet is native. Point being, YNDX stock has more going for it than most investors may realize.
While the Western world’s mobile-Internet market is now well-developed and Russia’s smartphone and tablet-based connectivity won’t likely become the norm for a few more years, China is now starting the rapid-growth phase of mobile broadband industry. And, that’s playing right into the hands of Baidu.
China’s mobile web search space is fiercely competitive, though BIDU has been smart about keeping its commanding lead in that space. As an example of its innovative thinking, it introduced “light apps,” which allows a user to open an app on his or her smartphone with a search queries results … even if that app isn’t installed on the handheld device.
Competitor Qihoo 360 (QIHU) responded by doing the same on its mobile search results pages, but Baidu was clearly the first to the market on the front. BIDU is apt to out-innovate the mobile competition in the future as well, especially now that it’s gotten serious about making “91 Wireless” app marketplace into a more potent package of mobile-based tools and attractions.
Whatever the reason, Maxim Group recently upgraded BIDU stock to a “buy” based on the research firm’s estimate that Baidu owns a commanding 57% market share of China’s mobile search market, which is the most important market for any Chinese search company to dominate right now as the country’s consumers fall in love with mobile.
So what’s the final verdict? Is YNDX stock a better bet than Google? Would an investor be better off owning BIDU stock rather than either of the other search giants?
Among the three, Yandex is the most interesting and risk-adjusted play.
While Google is undeniably an icon, GOOG stock is a crowded trade that’s difficult to dance with. Baidu is also a quality name with a commanding lead it its market, but its nearest competitor, Qihoo 360 has managed to carve out 22% of China’s search business in less than two years. BIDU stock owners may find China’s search market is far more competitive than the U.S. market, which makes BIDU stock vulnerable.
Meanwhile, although the Cyrillic alphabet orientation may mean the potential of YNDX stock is limited, it also keeps most serious threats at bay. Better to be the only big fish in a little pond, especially if nobody sees you coming. That’s most definitely Yandex.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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