Google Sell-Off Makes It a Superior Choice to Baidu

Includes: BIDU, GOOG
by: Mark Krieger

In a previous article comparing BIDU and GOOG, my analysis revealed that GOOG was by far the better investment. The reality is, I could not of been more wrong; since then, GOOG has lost 15% of its market cap while BIDU has nearly tripled (up by about a 2.5 factor). The disparity between the two has reached epic proportions, causing me to question whether this is actual reality or a figment of my imagination. The point is, if I thought GOOG was a better deal back then, today’s glaring value difference appears even more prominent.

GOOG’s latest earnings: The bloodshed accompanying GOOG’s latest quarterly results (see conference call transcript here) represents a decent buying opportunity, as its nearly 10% whacking was clearly an overreaction and an opportunity for value investors to acquire shares, following a significant drop in GOOG’s forward PE from about 17 to a tasty 15. After all, the company beat on the revenue side and just missed by a couple pennies on the bottom line, mainly attributed to a hike in employee pay (it takes money to attract and retain some of the most gifted employees in the country).

GOOG’s shares are now down about 15% from their January 2010 levels and about 25% below their all time high of $700; in contrast, BIDU shares are at all time highs and selling at an expensive 58 times 2011 estimates of $2.54, which some might argue is too lofty.

GOOG’s stellar balance sheet: GOOG is sitting on over $35 billion in cash, representing an impressive 20% of its market cap of $171 billion. The company’s cash hoard could even lead to a cash dividend policy being adopted. It sells for only four times book value, a metric resembling nearer a manufacturing entity than a high tech operation. BIDU’S balance sheet is no slouch either, except that its metrics are much less desirable, selling at 40 times book and a cash position representing only 2.4% of its market cap of $51 billion!

Upside potential: GOOG’s median one year analyst price target of $750 indicates potential robust appreciation of more than 50%, while its low target of $519 is just a hair away. Its reasonable PEG ratio of .99 assumes an 18% five year growth rate. BIDU’s expected “over the top” growth rate of 58% is nothing less than spectacular, but even with this sky-high number, its PEG ratio also computes to .99.

BIDU’s low analyst target price of $95 represents a budding 36% implosion, while its median price target of $142.50 has already been soundly eclipsed; either analysts need to increase their targets or downgrade the shares on valuation purposes.

Conclusion: Since BIDU’s growth rate is slated at three times the rate of GOOG’s, it is being set up for disappointment, as its orbital expectations are just too unrealistic. An investment in BIDU presents more risk for less reward. On the other hand, GOOG’s recent hammering makes it attractively priced and the superior choice for risk adverse investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.