Sunday, May 2, 2010

Google vs Baidu

I don't usually spend much time on tech stocks but this caught my attention. A few days back, Susquehanna raised the price target of Chinese Internet search leader Baidu, Inc. (BIDU) to $ 1,000. At that price, Baidu's market value would be ~$ 35 billion.

The company also announced that it earned ~$ 70 million this quarter and is expected to earn ~$ 350 million for the full year.

So that target price represents a 100x multiple of this year's expected earnings.

Some facts on how Baidu compares to Google (GOOG) in terms of size and valuation.
  • Baidu, at least in comparison to Google, is still a relatively small company (though definitely not a small market capitalization). Consider that Google earns* ~$ 1 million/hour. That means Google can earn in 70 hours what Baidu earned last quarter.
  • Google is expected to earn ~$ 9 billion this year and currently sells for less than a 20x multiple of those earnings. With over $ 26 billion of cash and no debt, Google's multiple of enterprise value (market cap+debt-cash) to earnings is more like 16x.
I'm not saying Google is a good investment, I bring it up only to put Baidu's size and valuation in perspective.

Baidu is growing relatively fast and is currently the leader in internet search within China. Baidu may, in fact, be a good business. I have no idea. Internet search in China is not an area that I have any particular expertise or insight but a 100x multiple on just about any asset concerns me (unless that business is in a cyclical earnings trough).

In order to justify that 100x multiple, a person buying this stock has to 1) really trust the sustainability of Baidu's leadership and growth rate or 2) be in the business of looking for the "greater fool".

I wouldn't know how to figure out 1) and have no interest in 2).

It's also possible this an initial sign that inflated multiples on certain anointed stocks (if not the same, not unlike the late 90's early 00's) are making a comeback.

Let's hope not but it's worth keeping an eye on.

Adam

Long GOOG

* Based upon Google's most recent quarterly earnings run rate
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