The Investments Blog: Google vs Baidu

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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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Origin of Newton's 4th Law?

"Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases." - Warren Buffett

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A temperamental market pretty much assures it.

Those with a long investing horizon, it's worth noting, actually benefit from lower stock prices in the near-term (though not many market participants seem willing to put this truism to effective use). Those who attempt to profit primarily via speculating on short-term price action likely won't find this way of thinking to be of much interest.

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Notable Quote

"Warren and I have not made our way in life by making successful macroeconomic predictions and betting on our conclusions.

Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.

I recommend to all of you exactly the same attitude.

It's kind of a snare and a delusion to outguess macroeconomic cycles... ...very few people do it successfully and some of them do it by accident. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?" - Charlie Munger

The Investments Blog

Sunday, May 2, 2010

Google vs Baidu

Origin of Newton's 4th Law?

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