The Shanghai Composite Index is not a safe place to put money right now, and therefore, Chinese stocks have been risky investments.
While Baidu Inc (BIDU) and Alibaba Group Holding Ltd (BABA) are without question the cream of the crop when it comes to technology, the current state of the Chinese economy, along with the volatility in U.S. and Chinese equity markets means that both stocks have been under significant selling pressure in recent memory.
Hence, owning both BIDU and BABA is not a good idea right now. However, one or the other might be a great idea.
Therefore, which Chinese titan is best: Alibaba or Baidu stock?
Which Is Growing Faster?
Most know the core businesses of both BIDU and BABA.
Alibaba operates in the e-commerce space, whereas Baidu’s bread and butter is online search — it’s otherwise known as China’s Google. However, each company has their hands in a number of other businesses like travel, applications, social media, etc., and has also made big investments throughout the world in various industries.
Collectively, these diverse operations, along with a leading presence in core markets, has allowed BIDU and BABA to grow revenue at a compound annualized rate of 50% and 56%, respectively, over the last three years.
However, past growth is neither here nor there. What’s really important for the future of Baidu and Alibaba stock is future growth.
The consensus among 25 analysts who cover BIDU is that it grew revenue 35% last year and will grow 24.5% this year. For BABA, there are a whopping 42 analysts covering the stock, and the consensus calls for growth of 29.1% and 30.8% in fiscal 2016 and fiscal 2017, respectively.
Hence, BABA is growing faster than BIDU, a fact that is important to keep in mind.
Which Is Cheaper?
Next, let’s look at the valuation of each company. Remember, it would be OK if BABA is slightly more expensive than BIDU because it is growing slightly faster. Theoretically, companies that are growing faster have higher multiples attached to their stocks, because the expectations are higher.
However, Alibaba stock trades at just 22 times free cash flow, whereas Alibaba stock trades at 35 times its trailing 12-month FCF.
Furthermore, Nasdaq.com shows that BABA is expected to have faster earnings growth over the next year, at 39.6% versus 37.2% for BIDU.
Both companies are growing fast, that’s undeniable. However, BABA is growing revenue and earnings faster and is a cheaper stock relative to free cash flow.
When you consider these collective facts, it is quite hard to make a case that BIDU is a better investment opportunity than BABA right now.
In fact, let’s take it one step further and just say, buy Alibaba stock, not Baidu stock!
As of this writing, Brian Nichols did not hold a position in any of the aforementioned stocks.
