Why Baidu Is A Better Buy Than Google

| About: Baidu, Inc. (BIDU)


Baidu's robust quarterly performance is a sign of better things to come.

Baidu should continue to benefit from entering into the mobile.

With the Chinese internet penetration set to grow, Baidu has more upside potential.

Baidu has more room to grow than Google. Hence, it is the better pick out of the two.

It has been a roller-coaster ride for shares of Chinese search giant Baidu (NASDAQ:BIDU), but the shares are in green territory with gains of 10%. Baidu is plying its trade in a highly-competitive Internet industry in China, and it has faced tough challenges from the likes of Qihoo 360 (NYSE:QIHU). However, the good thing is that it has been able to stave off competition from Google (NASDAQ:GOOG), which hasn't been able to make a mark in China due to government regulations. Moreover, Baidu seems to be a better buy over Google due to its solid valuation and prospects in China.

Let's take a look at Baidu's results and its growth strategies to see how it might do in the long run.

A robust performance

Baidu's recent results were strong as it reported an upbeat first quarter, with total revenue of $1.53 billion, up 59% from the previous year, beating analysts' estimate of $1.5 billion. The company reported an EPS of $1.24, better than the estimate of $1.03. Baidu reported higher revenue because it saw a huge increase in its active online marketing customers during the quarter, reaching a number of 446,000, an 8.8% increase year-over-year.

The expected revenue for the second quarter of 2014 is between $1.90 billion to $1.95 billion, which would be 56% to 60% more as compared to the previous year. So, it is clear that Baidu is on track to report terrific growth going forward, and this is a result of solid prospects.

Expanding its wings

Baidu recently entered the mobile market by introducing mobile payments, map services, and apps. Baidu's mobile maps, with over 190 million monthly active users, has topped the charts in China's mobile map industry, with almost 65% of the market share. Comparatively, Google only has 9% mobile map market share in China, respectively. In the first quarter, daily active mobile search users touched the count of 160 million.

This upper-hand is credited to Baidu's versatility, as a search engine with faster load speeds, better location extensions, optimized ad formats and features like click-to-call, click-to-download buttons and so on.

Baidu, being the leader in app distribution in China, has extended its market, crossing a score of 100 million app downloads on a daily basis within just two quarters of the acquisition of 91 Wireless. This acquisition of 91 Wireless has helped strengthen the company's online gaming segment and has significantly improved Baidu's app distribution capability. The company continues to lead in this quarter, exceeding 100 million daily app downloads, and is expected to sustain its leading position in app distribution.

Solid fundamentals

Baidu has a trailing P/E of 38. Moreover, its earnings are expected to grow at 25% for the next five years. Comparatively, Google's earnings growth projection for the next five years is lower at just 14%. Hence, even though Google is slightly cheaper at 31 times last year's earnings. As a result Baidu is a better prospect for the future despite being slightly expensive.

Also, Baidu boasts of stronger margins than Google. Baidu's profit margin is 31%, while its operating margin stands at 32%. Comparatively, Google's profit margin is just 20%, while the operating margin is 23.41%.

More impressive strategies

Baidu's cloud storage, which allows its users to experience data storage in a very fine way across devices, has also shown a strong momentum. It had 160 million registered users last quarter, which is a 60% increase from two quarters ago.

Under its Light App initiative, functions like Baidu Wallet help bring users into the Baidu ecosystem with the addition of more and more user-friendly features adds to the search engine's reputation. With this exciting new feature, the customers can now aim for users in specific cities and not only on provincial level.

Ensuring the security of customers, the Plus V verification program is launched so that only the customers who have Plus-V verification can advertise on the engine's search page. This strategy is also likely to increase the customer base.

Baidu is on top in PC search, and is looking forward to prosper in the mobile search business. The coming quarters will see robust growth in revenue and earnings with mobile payments, map services, online video and app distribution as the key performers. With the stock trading at a 40% discount to fair value, the company's prospects look strong.

A big opportunity ahead

China's internet penetration rate, which currently stands at 42%, is expected to grow to 800 million, or 60% before the end of 2015. A 44% increase in average revenue per customer shows that Baidu's monetization strategy is working pretty nicely and a further increase in internet penetration will undoubtedly benefit the company.

In addition, Baidu is making progress in the app distribution field. During the end of 2013, Baidu had over 100 million daily app downloads in China. So, with the various positive moves that it is making, Baidu looks all set to benefit from the fast-growing Chinese internet search market, making it a solid investment.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.