Yahoo or Baidu? The Choice Is Clear

Believe it or not, Baidu’s market cap of $15 billion is quickly approaching Yahoo’s stock value of $23 billion.

YHOO is currently being priced at the market at only 1.5 times that of BIDU yet, in an “apples to apples” comparison, blatant discrepancies stand out. YHOO is expected to generate $5 billion in sales and $700 million in earnings, while BIDU is forecasted to produce a top line of $900 million and earnings of $309 million (assumes a staggering 44% growth rate). The point is, YHOO’s sales are almost six times higher, while its earnings are triple that of BIDU. Therefore, it is reasonable to deduce that YHOO’s market cap should be three times that of BIDU, not one and half. There are inefficiencies between these two equities that should be exploited before the market eventually recognizes this abnormilty and prices them accordingly.

Shareholder’s equity: YHOO is selling at only two times book (if you add in the market value of its Asian equity interests, it is probably selling closer to actual book), while BIDU is selling at more than four times its book value.

Bar set too high: BIDU is expected to achieve 44% earnings growth in 2010 versus only 10% for YHOO, creating a very high bar for BIDU and a very low one for YHOO. It will be much easier for YHOO to clear its bar than BIDU, making BIDU certainly the higher risk choice. That is probably why analysts have set YHOO’s one year high target price at a 44% premium to today’s share price, versus a 10% premium for BIDU’s.

YHOO has transparency: When YHOO insiders sell their shares they have to report the activity to the SEC. BIDU does not. This lower reporting standard gives them more flexibility to hide unfavorable events and ponder accounting shenanigans.

Analysts getting bullish: Since June, seven out of eight YHOO analyst actions have been positive (six upgrades, one initiation of coverage with a buy and initiation of coverage at neutral) while BIDU has seen three out of four analysts turn negative (two downgrades, initiation of coverage at underperform and one upgrade).

Bottom line: Although YHOO’s earnings growth is in the tank, it’s potential to fix its operational problems are enormous. It has minimal risk and huge opportunity for gain.

BIDU on the other hand, has already quadrupled from its 52-week lows (YHOO has doubled) and is selling at perfection and then some. BIDU’s upside is about 10% while its downside is nearly 50%. YHOO’s upside is 100% while its downside is 30%. By going long YHOO at these levels, your risk reward ratio is 2, meaning a buyer expects to earn double the amount he is risking. Purchasing BIDU at these orbital levels gives the holder a .20 ratio or the chance to earn 20 cents for every dollar invested, making BIDU something you shouldn’t touch with a ten foot pole.

Comments

[Jonathan Swift:]

You make it sound like both of these companies are in identical markets and environments. Are there no other reasons to distinguish the prospects for YHOO vs. BIDU?

Nov 11 05:39 PM

[Nettligent:]

Yahoo is ready to grow in 2010 and beyond.

Nov 11 07:16 PM

[BioBoy:]

Yahoo! is a dying, soon-to-be-dead company. The offer nothing. They create nothing. The only thing of value is the name.

Nov 11 08:39 PM

[mikemichaelson:]

wow what a crappy article. you might want to put a disclaimer that you own the stock or options.

Nov 12 01:51 AM

[User 497660:]

Why would anyone be bullish on YHOO? Their only asset is the number of people that visit the site to read email. Unless its really cheap, I'd never advertise via Yahoo. However, overpriced BIDU is targeting a population in China alone that is orders of magnitude larger than the US. Its been established that Google is not a household name in China, and has no traction there either.

Nov 12 08:23 AM