China presents a wealth of opportunities for growth in online commerce. While it has censorship restrictions and more government monitoring of traffic than exist in the Western world, there is fertile ground for companies that provide search engines, online commerce, advertising, content and mobile applications. Baidu (BIDU) is the Google (GOOG) of China and has captured over 80% of the market share.
Baidu's logical comparison is Google. Baidu is the predominant search engine in China. It has more than 50 communities and services online that include search, maps and mobile OS. It provides the platform for 740 million web pages, 80 million images and 10 million multimedia files. It is number four in the world for traffic and number one in China. Of 64 billion search requests in China, 53.5 billion of them are done through Baidu. It controls 83.6% of searches in China against Google's 11.1%. Notably, Google scaled back its plans for expansion in China due to government restrictions. How much bigger can Baidu get?
The company had a great second quarter 2012 and is looking to expand its reach by providing services to and assessing all opportunities in the mobile internet and cloud sectors.
Baidu's second quarter earnings of $858.8 million were 59.8% higher than the same period in 2011. Operating profit increased 51.5% from the same period in 2011 to $443.1 million. The company has $2.88 billion in cash and $447.5 million in debt. Its current ratio is 4.69 and book value per share is $9.03. The float is 78.9% owned by institutions. Baidu's common stock trades around $109. It has a year high of $154.15 and low of $99.71. The price earnings ratio is 28.28 and earnings are $3.86 per share.
Baidu's revenues in the past have been driven by the laptop and desktop markets. The company is looking to expand its operations and market share of the mobile and cloud markets through recent marketing initiatives. China's adoption of android and mobile technologies grew by 401% in 2011. China, along with Brazil ranks in the top ten countries with the most total Android and iOS devices in use. Baidu has made the right choices in a timely manner to meet the needs of the explosive growth in mobile usage in China.
The company launched Baidu Explorer, its new mobile browser which claims to be faster than existing browsers including Google Chrome and Apple's (AAPL) Safari. Apple has enabled Baidu as a search option on its latest iOS platform. Baidu's mobile product has the capacity to run up to 100,000 web based applications through the browser, dispensing with having to install any additional software. It is currently making expenditures in the cloud computing sector, so that bears some watching for future events.
The landscape in China for companies in the same space as Baidu is changing and growing at a dramatic pace. Some of Baidu's competitors offer an investment alternative in the market.
Sohu.com (SOHU) offers Chinese online media, search, gaming, community and mobile services. It trades around $40.6. The company has $865.44 million in cash and zero debt. It has a book value per share of $26.83. The float is 69.7% owned by institutions and 21.63% owned by insiders. The float is 18.2% short as at August 15th.
Renren (RENN) operates a social networking Internet platform in China. Users connect, communicate, share information, user generated content, and play online games and music. It trades around $3.70 and has earnings per share of $0.01. The company has $922.11 million in cash and zero debt. It has a book value of $2. The stock's float is over 85% in the hands of retail investors and is largely ignored by institutions and funds.
SINA (SINA) offers online media, advertising, and provides regional focused format and content including news, sports and automobile related news. SINA trades around $62 has, negative earnings per share of -$4.12. The company has $716.3 million in cash, $2.2million in debt and a book value per share of $17.07. Only approximately 12% of the float is available to retail. The institutions and insiders don't like it much these days as 10.6% of the float is short at August 15th, 2012.
Companies entering the search space in China include Qihoo 360 (QIHU) which has morphed from an antivirus and internet security concern to a web browsing company. Qihoo trades around $23, has a year high of $26.35 and earnings per share of $0.38. The company has total cash of $359.1 million and no debt, the book value per share is $3.55. The stock has approximately 55% of the float available to retail investors and is less than 1% short as of August 14th, 2012.
Renren is an interesting alternative as there is a lot of room for a retail investor to move in and out of the stock and it is not at the mercy of institutions hitting a stock price and the sell button at the same time. It has good fundamentals and is trading at a smaller book to market price than all of the other companies mentioned. Sohu may be an interesting consideration as its market price to book value is attractive and there are opportunities once the shorts start to cover but its retail float is limited. SINA has limited opportunities for retail sized investors. Qihoo is a promising prospect as a new entry into the search engine space and it has enough liquidity to be attractive to retail sized investors.
The debt situation on all of these companies is limited or nonexistent which is compelling and indicative of a capital market at its nascent stages. Forbes' listed 200 companies in China under $1 billion and noted that on average 67% of the listed companies, of which Baidu was one in 2011, carry no debt at all.
All of the companies offer alternatives to Baidu, but I don't see a giant killer among them. I think that it is more possible that these companies are acquired by Baidu as time goes by. As growth stocks go, Baidu has provided stellar returns since going public in 2005 and has been the picture perfect growth stock. It may be that the stock has reached its pinnacle and there are other options that are strong growth candidates in the market.
China is exciting, not only because of its growth trajectory in the past 10 years but also in terms of the companies that make up the Internet landscape. There will be other competitors that enter into the market as it matures and it will be more than interesting to see how Baidu operates in a bigger competitive environment. There are many opportunities to take advantage of the growing and changing market. China's broad market is volatile and the fortunes of many of the companies are tied to broader performance of China's economy. Baidu's share price will be impacted by any pullback in growth in China's capital markets and country's economic growth. It is the biggest and the best right now and its stock is pricey, compared to other players. Bigger is always better in mature stock markets for investors who are risk adverse.
Baidu is in a unique position of being part of a new economy and providing new and necessary technologies for advancement in the new economy. As long as it remains able to adapt to rapid change, the stock price will continue to perform well for investors. In the interim, buyers that can tolerate volatility should look to other companies in the space for trading opportunities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.