Last January, Google announced it had a new approach to China and eventually moved its servers to a Hong Kong address. The main destination for the search consumers that Google left behind has been Baidu. In fact Baidu is now aiming for 79% market share (I guess they don't understand the 80/20 rule yet in China)
Search Engine | Q1 2010 | Q4 2009 |
|---|---|---|
Baidu | 64% | 58.4% |
30.9% | 35.6% | |
Sogou | 0.7% | 1% |
Soso | 0.4% | 0.7% |
Others | 4% | 4.3% |
Revenue climbed 60% to $189.6 million. Earnings soared 165% to $2.02 a share. Analysts figured that the company would earn just $1.50 a share on $180.1 million in revenue.Definitely seems like the Chinese search space is a good place to do business.Better yet, the company is targeting $268.1 million to $274 million in revenue for the current quarter -- 67% to 70% ahead of last year's showing. Now that's accelerating sales growth! Analysts figured that revenue would only grow at a 49% clip, to $240.1 million, for the next quarter.
Now, five months is not that long a time in the stock market, but I thought it would be worth checking the shares of Google and Baidu since Google's announcement of their new approach to China. So compared BIDU (up about 80%) and GOOG (down around 20% (hey maybe they do get the 80/20 rule in China!)). Since they trade on different markets I included both the S&P 500 index for US and the Hang Seng Index for China. They are both down slightly for the year (then again we knew that), but GOOG is actually underperforming both indices as well.
Not sure how much of this is attributable to Google's China policies, but it is interesting. Granted Baidu has more room to grow with a $23B market cap compared to Google's battleship-like $150B market cap, but still click the above chart - those are starkly different (albeit short term) results for two competing companies.
What to do
I am not sure you can call Google's stock cheap by most metrics, but the current P/E is only 21 (Salesforce.com is 144(!), Rackspace is 62, Amazon is 51) and the forward P/E is under 15. That is not super pricy for a company with $6B in free cash flow and I think we'd agree that outside of China a pretty good moat. In addition to China, one other reason Google is cheap relative to its sector is that they have a history of mistreating shareholders. They have used dark arts like repricing options and other shenanigans. But still when you line them up next to Salesforce, Rackspace, Amazon, and others, they look to be selling at a good price.
Did I miss anything? Any other comparative companies that should be included? How much of the underperforming the index is due to China? WIll that be a long term drag on earnings? Do they have any other rabbits that they can pull out of their hat?
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