Is Google the Future for China?

Includes: BIDU, GOOG
by: Vieira Trading

We have seen many articles published on the controversy between Google (NASDAQ:GOOG) and the Chinese authorities. Most of them criticize the situation and very few of them offer solutions.

Recently, Google CEO Eric Schmidt told reporters that, "Something should happen soon," and he acknowledged that Chinese officials and Google executives are in negotiations.

In a global economy it does not make any sense to have China without Google and vice-versa. The fact that a country does not agree with some Chinese policies does not mean it has to shut down its embassy. 

Google is in China and it should remain in China for several major reasons.

As a true leader, Google has shown to the world the company is sensitive to important matters, such as on existing censorship which others are willing to disregard. However, the correct strategy is to innovate as a leader does and not to shrink back from an existing problem. We are certain that many Chinese share Google's point of view, but they will not abandon their country.

When the company entered the Chinese market, they knew the rules. We fully understand there may be important ethical principles, which have to be taken into consideration. However, a solution to this problem requires a long term process. We believe in the future and Google's fight for certain principles. These concerns are akin to the music and software industry taking important steps against piracy. 

Google could positively "shock" the market, announcing they are increasing their investment in China, and this is in fact what Google has to do. To use Apple (NASDAQ:AAPL) as an example: are the Chinese able to live without an iPhone? As a matter of fact, we all are, but that is not the point. The point is that Google, like Apple, has the best tools. It has to be able to reach the consumer through different channels: mobile phones and the internet. For the same reason, Google is the best partner for Chinese companies, as it is not a mere search engine like its rival Baidu (NASDAQ:BIDU).

It is a good time for Google executives to read Sun Tzu, the “Art of War,” Maneuvering and Variation of Tactics, Chapter VII and VIII respectively.

Shareholders are waiting for Google's commitment, not because of the present relevance of the Chinese market in company numbers, but to know how its team can effectively respond to complex global challenges. This commitment should not come out as a simple confirmation that the company is staying in China (that’s what bloggers are waiting for). Google should indicate a clear definition of an aggressive and innovative strategy towards the Chinese market covering key points to make Google the desired search engine in China.

We have confidence in the executives at Google but we have even more confidence in Google as a team. They have created revolutionary technologies improving everyone's lifestyle. They have improved the way we all interact with technology by making it easier to use. So, Google, it is time to show to everyone once again that you are all about vision, leadership, and execution.

Google's indecision has helped speculators fuel an unprecedented rally in shares of its rival Although Baidu has strong earnings growth, should it trade as the only internet search engine in China? Our answer is no. 

This rally in Baidu has been fueled by consecutive upgrades by Wall Street firms. This reminds us of similar consecutive upgrades in oil to $200. It will only work while there are fools that believe the story such as, "oil prices will continue to rise," or in this case Baidu is the "Google of China." 

On the other hand, Google has a modest forward PE, a global presence (the rest of the world does not use Baidu), and the assurance that it is by far, less prone to a sell off in the case the stock market reverses. One might argue that this is not what investors are currently thinking. Our answer is quite simple, we prefer to go with a company that has demonstrated to be a leader across different fronts.

Google has vision and it is likely to remain the number one search engine for the next five years. Because of this, we sleep better at night and nowadays that has some value.

 Beyond Trading has a $560 target in Baidu considering the scenario Google leaves China and a $640 target in Google independent of that scenario.

Disclosure: No positions