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High-fliers Netflix (NASDAQ:NFLX) and Baidu (NASDAQ:BIDU) reported record second quarter profits on Monday afternoon. Netflix reported a profit of $68.2 million or $1.26, and revenue of $789 million, beating analysts’ estimates on earnings but missing slightly on revenues; guidance trailed estimates. Baidu reported a profit of $252.6 million or 72 cents per share, on revenue of $528.4 million, comfortably beating analyst estimates on both the bottom and the top line.

Netflix and Baidu have been moving in tandem in the last two years, outperforming the S&P500 by a huge margin, but they followed sharply different paths in aftermarket hours: Netflix’s shares dropped by 10 percent, while Baidu’s shares rose by 7 percent.

Source: yahoo.finance.com

To justify the high valuation of both stocks, bullish analysts have been comparing Netflix's and Baidu's performances against other web-based and social media stocks. When compared with each other, Baidu commands a better valuation in terms of PE, profit margins, and earnings and revenue growth. Baidu has further a stronger market position, as barriers to entry in the Internet search engine market are far more binding than barriers to the video download market. This means that Baidu is in a better position to preserve profit margins than Netflix. But can Baidu revenues and earnings double every quarter?

Company

Netflix

Baidu

Forward PE

42.34

39.19

Diluted EPS (ttm)

3.48

1.82

Profit Margin (ttm)

7.91%

45.44%

Operating Margin

13.72%

51.04%

Quarterly Revenue Growth (yoy)

45.60%

88.30%

Quarterly Earning Growth (yoy)

86.60%

122.88%

Source: yahoo.finance.com

We don’t think so, especially for a company that operates in a vague business regime, as is the case in China, where the government can change business rules overnight and wages can double from one year to another. Conservative investors are better off staying away from both stocks.

Source: Netflix and Baidu Part Paths; What Should Investors Do?