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Mar 24 2010
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Baidu vs Google

Filed under: Industry » Internet, Sector » Technology, Ticker » GOOG, BIDU,

Should You Invest in Baidu? Or Google?

Is Baidu really worth as much as it's trading for? Will Google leave China? If so, will other businesses follow suit, and if so, how will this affect the Chinese economy? This and more, as we discuss the ins and outs of Baidu vs Google and their role in the Chinese and world economies.

With all the hype around Baidu lately, it almost feels like we're in the late 1990's again, with China having a tech surge of its own. Sure, the China economy is growing at a rapid clip, and they have the largest number of Internet users of any nation, and those Internet users still only make up less than a third of the population. Sounds like the ultimate, top dog growth opportunity for an investment, right? Not so fast.

Baidu Vs. Google: Business Models

Baidu earns money in almost the same way it's main competitor, Google does - via online advertising. They have an advertiser/ publisher network setup similar to Google, where advertisers pay for sponsored links in Baidu search results as well as on publisher pages. Publishers are then compensated (via a commission-based structure) for ad revenues. Similar to Google, the majority of revenues come from millions of small business owners, not a few large corporations. However, there are some major differences between the two companies that warrant a closer look.

How Business Friendly is China Really?

Google China Gets Hacked

A recent attack on Google's servers in China has caused Google to threaten to pull out of China. According to Google, "In mid-December, we detected a highly sophisticated and targeted attack on our corporate infrastructure originating from China that resulted in the theft of intellectual property from Google. This attack was not just on Google. As part of our investigation we have discovered that at least twenty other large companies from a wide range of businesses--including the Internet, finance, technology, media and chemical sectors--have been similarly targeted. We are currently in the process of notifying those companies, and we are also working with the relevant U.S. authorities."

Will Other Business Pull Out of China and Thereby Hurt Their Economy?

While this news immediately gave Baidu a stock a boost - as it would stand to gain from the just under 1/3 market share that it's missing from Google, it no doubt added to the worries of U.S. authorities regarding electronic attacks from China. Yes, China has opened its doors somewhat to the West and Western companies have proceeded to pour in. As a result, China's business has boomed this past year. But what Baidu investors aren't thinking about, is that if Google can't do business in China, who else will run into troubles? The gradual stifling of Western business operations in China could cause their economy more harm than good in the long run. 

Baidu Vs. Google: Demographics and Visitor Statistics

The important thing to consider in regards to Baidu is this: where do their revenues come from exactly? According to Alexa, the largest gatherer of public website statistics, we see that an estimated 96.6% of Baidu visitors (by which we mean visitors to their search website - baidu.com) originate from China. We also see that the vast majority of Baidu users are aged 25-34. Further digging into statistics reveals that more Baidu users are female, have children, and have less than a graduate school degree. Finally, it appears that a large percentage of users access Baidu from school.

Google, on the other hand, has more users aged 55 and up visiting their website than they do visitors aged younger. Their visitors are also more male than female, less have children, and more have a graduate degree than any other degree or no degree at all.

You would think that with the similar business models and target audiences, the statistics for Baidu and Google would be somewhat similar. While these statistics themselves may indicate, with deeper analysis, the success' and failures of various avenues of each search providers' business model; what they indicate to us is the disparity in economic cultures. China is in the middle of a period of great economic change and growth, and the road to stability, as history has shown numerous times, can be a bumpy ride.

Baidu Faces Censorship and Copyright Violation Concerns

China, as a country, may be thousands of years older than the United States. But as a modern, industralized, economic force, it is young and growing - and as the various censorship and copyright issues in the Chinese world of search suggest (Alexa statistics show a large percentage of Baidu searches for mp3 files - supposedly users use Baidu to gain access to pirated copies of music; Baidu has been accused of biasing search results in favor of higher paying clients; the Chinese government censors search results and disallows access to social media platforms where citizens may express their freedom of speech, etc.), the nation has a ways to go before it matures to the economic state of Westernized nations.

That bears two implications - the first, the growth opportunity, and therefore investment opportunities in the Chinese economy, are tremendous; but then there's the other side - the risk. As the economy grows, it will face many challenges and issues as it grows and develops. In our opinion, the surge in Baidu stock, to over the $500/ share level, no doubt due to its high profit margins, continuous growth expectations, market dominance, etc. - factors in too much good news and not enough of the potentially uncertain and bad news.

Google Vs. Baidu

As a final note, if you want to invest in search, we recommend investing in Google. The potential news of its pull out of China has given the stock a bit of a pullback, and if, in the unlikely event it does pull out of China, and loses 6.5% (according to Alexa) of its search traffic, it will no doubt take another hit.

But the bottom line is that Google is a $183 billion (in terms of market capitalization) company, whereas Baidu clocks in at a mere (in relative terms) $19.1 billion. There's been a lot of talk lately about Google vs. Baidu. Yes, Baidu is beating Google in China, and the Chinese economy is growing at a rapid clip. Yes, China has the most Internet users of any nation. But - it will be a while before the Chinese economy is as efficient and industrious as those of Western nations. And therefore, we feel the surge in Baidu stock is somewhat premature.

Baidu's business model, while sound, has faced significant criticism and pressure over the past few years, as noted above. In addition, although it may rank as the #8 most popular website overall (according to Alexa; Google is #1), it's primary dominance is in China, and China only. Its business model, at this point, may be tailored too much to the Chinese business model, and not a more internationalized business model, like the one Google is using, to enter various markets worldwide.

That would explain why, according to Alexa, Google has a whopping 727,036 sites linking to it, while Baidu only has 58,665. That's a much larger disparity than their traffic rank, and is a good indicator of their online reputation. After all, that's how both search engines decide who ranks highly in the most important part of the search world - the organic search results, or those that you can't buy. Visit the Guru of Search for more insight into the world of search.

Until next time, get informed before investing. Make your investments Informed Investments.

Google Stops Censoring in China

3.23.10 - It looks like Google wasn't bluffing. In an unprecedented move, Google has stopped censoring its search results in China today. This will apply pressure to the Chinese government to make a decision - will they stick to their guns and disallow Google from operating in their country, or will they step down? 

Their response will provide a precedent not only for the development of the search market in China, but for U.S. - China relations and economic development in China in general.

Time to Sell Baidu

Surprisingly (or not, depending on how informed your investment decision is), Baidu stock has been going up ever since the announcement. This is, no doubt, due to buyers believing that Google leaving China (they're assuming the Chinese government will give Google the boot) will increase Baidu's market share by 30% (Google's cut of the Chinese search market) and make Baidu an even more powerful force in the world of search. While the former may be true, the latter most certainly is not.

Look at it this way - Google will not be hurt much by this move, as their business in China comprises only a paltry 1.5% of their revenues. What does that say about Baidu? If a third of the Chinese search market is equivalent to only 1.5% of Google's revenues, Baidu has a long way to go before it becomes the Google of China. And we have reason to believe it will have trouble doing so. If Google is forced to leave China, the lack of market stimulating competitive forces will hurt not only Baidu, but the Chinese search market in general.

Not only that, but strained relations between the U.S. and China will make it difficult for the Chinese economy to continue growing at the rapid clip it has. Baidu stock is up over 300% this past year. At this point ($600/ share), any potential upside is factored in and we recommend selling your Baidu stock.

The Great Firewall of China

It's not uncommon knowledge that China restricts one of the covenants we hold most dearly here in the States - that of free speech.

In the past, China has censored search results, YouTube videos, and other forms of media to help control the content its citizens have access to. Just the other day, China started blocking searches on sensitive subjects such as Tiananmen Square and the banned spiritual sect Falun Gong on its Hong Kong-based Google site, Google.com.hk. Last year, they blocked viewing of YouTube videos that contained anti-government protests by Tibetans.

Government barriers such as these, which are often referred to as the Great Firewall of China, have prevented tens of millions of Chinese from accessing news and facts the rest of the world has access to.

Human Rights organizations, as well as the Obama administration, praise Google for their stance. While China insists that the friction between them and Google will not affect the investment environment in China, history suggests otherwise. Observers suggest that the outcome of Google and China's dispute could have implications that affect other Westernized businesses, and ultimately the relationships between China and the Western business community.

Average: 4 (8 votes)

Average: 4 (8 votes)

China population

To the author of the above comment: It is most definitely not true that China has around 1.5 trillion people. The number stands at roughly 1.4 billion. Quite a difference in the target consumer group by any standards.

Baidu

Joke's on all of you anti-Chinese fellows. Baidu rules.

Baidu vs Google

With many players in any particular field we can assume the competition to be highly competitive which improves the final output or performance, the same is the case with Google and Baidu. With any one player in any field the output is not boosted.

Baidu stock still going up?

While I completely agree with your argument, I'm baffled by the fact that Baidu stock is still going up? It's in the $80/ share range now (which translates to $800/ share pre-split!). I wonder if the shares would be still so highly valued if the shares had not split? Maybe that's why Baidu split them to begin with? Smart management...or not - considering that the fundamental valuation hasn't changed. Thumbs down!

Baidu PEG

But what about Baidu's PET ratio? I noticed that it used to be way higher than the industry average (2.22 on Yahoo Finance), but since the split has gone down to an "undervalued" 1.07. How is it possible that a stock split would affect the PEG? That would indicate that a company can create value simply by reducing the value of each share...which makes me question the integrity of Yahoo's financial data?

Technical Analysis?

Since Google and Baidu are both Internet companies, how about doing a technical analysis of both? Ie. compare their traffic statistics, their advertiser base, their Western investment component and how it relates to technology portfolios, etc. etc. I'm with you that Baidu's current valuation is way overblown, and that the majority Western investment might end up hurting China in the end when the Chinese government pulls the plug on its formerly open and friendly business practices.

Baidu vs. Google - Technical Analysis

You have uncanny timing. We've actually been working on a somewhat in-depth analysis of the technical aspects of both businesses (for the financial folks - we're not talking about a technical investment analysis, but rather a fundamental comparison of the nuances of both businesses when it comes to technical results).

As you mentioned, we'll discuss online traffic patterns, user bases, search queries, and more. So far, I can tell you that there are some very revealing results, especially pertaining to the sustainability of Baidu's market share and profit margins, given their technical search trends and search market capacity.

Reasons to be Concerned

Since the writing of this article, Baidu's stock price continues to rise. Here's why we encourage investors to be wary of Baidu's current valuation:

China's business-friendly climate deteriorating

China's business-friendly climate is deteriorating rapidly, as the government enforces its own rules and regulations, putting a stranglehold on Chinese technologies and licenses, and thereby alienating Western business interests.

Internet adoption figures misleading

It's true that China has around 1.5 trillion people, and there is the potential for growth in Internet adoption (less than a third of the population, compared to around 75% for the U.S.). However - these numbers are misleading. The per capita GDP for China puts them at ~ #100, compared to #1 for the U.S. The average Chinese citizen cannot afford or make use of the Internet - at least not yet. It will take decades for mainland China to adopt Internet on the same scale its major cities do.

Profit expectations

Baidu's profit expectations are ridiculous, and they are fundamentally overvalued on a P/E, P/S, P/CF, PEG, and many other ratios. As soon as there is a drop in profit, the stock will plummet.

Short squeeze

The high short ratio has caused a "short squeeze" in Baidu's stock. The short ratio will adjust over time, and upside potential, as a result of short positions being covered, will be more limited.

Lack of competition

With Google out, Baidu's lacks a healthy competitive environment. This will more than likely result in it falling behind its Western counterparts, and make it more difficult to penetrate international markets.

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