Chinese internet provider Baidu (
) typically played the uber-Google (
) for U.S. investors, providing shareholders phenomenal gains as
its American competitor matured out of the land of super-growth
companies. But Baidu has taken a couple of steps toward that
transition itself recently, and it's making investors
Underperforming Google is not a natural state for Baidu.
Baidu shares gained more than 1,000% since its US IPO in 2006;
185% in 2011 alone. By comparison, Google's gains peaked at about
600% four years following its 2004 IPO. While Google investors in
recent years have done well, the shares have yet to regain
Has Baidu grown into Google? Several factors suggest the super
fast growth of recent years is coming to an end, although the
company likely will gain considerably in revenues and earnings
for years to come. The question isn't whether the company will
continue to grow - no one's betting it won't -- but whether its
future successes can continue to fuel share price growth at its
current incredible prices. The YCharts Stock Screener shows Baidu
shares as the third most expensive large cap trading when using a
comparison. YCharts Pro gives Baidu great balance sheet strength
but its worst possible score for share price valuation.
BIDU Price / Sales Ratio
Investors ramped up shares to these levels because money has
been pouring into Baidu. In the past three years alone, revenues
are up 413% while profit rose 643%, largely because of a Chinese
economic boom creating a new middle class. Baidu swamped
competition with an 80% share of search from personal computers.
When Google left China over censorship issues in 2010, Baidu
simply sucked up most of that business.
BIDU Revenues TTM
A recent pause in China's rampant economic growth has slowed
down consumer buying of things like computers and cell phones.
Search competitors like Sohu.com (
) and Sina (
) are growing more savvy. These companies and a few others
control the lion's share of mobile (think smartphone and tablet)
searches, leaving Baidu with about a 35% share there. It is
mobile, not PC search, that will provide the fastest growth for
internet search companies in the future.
Baidu is fighting for mobile business on several fronts, but
Research and development
costs have risen faster than revenues at a couple of points in
the past few years.
BIDU Revenues TTM
have been squeezed.
BIDU Gross Profit Margin
Last fall, Baidu announced a partnership with Dell (
) to develop smartphones and tablets with its own operating
system. It also convinced Apple (
) to make its search engine the default on Chinese iPhones, and
it is launching its own smartphone.
While these are surely smart steps, they are not panaceas.
Dell sells a lot of computers in China, but it's barely a player
in the Chinese mobile market. Apple added Yahoo (
) and Micosoft's (
) Bing as default search engines on U.S. iPhones several years
ago, but it didn't do wonders for either business. Google, too,
has its own smartphone. Anyone own a Nexus One?
In a country where most of the population still hasn't bought
their first computer or smartphone, Baidu's earnings growth
potential remains great. But with the share price in the
stratosphere and costs building, there's the potential to pay up
for Baidu shares just as they take a turn for the worse. A little
patience might make for a greater reward.
Dee Gill is an editor for the
YCharts Pro Investor Service
which includes professional