Baidu.com a Buy as it Squares-off with Google in China?

纵横四海

by Thom Buschman
The state-run China Internet Information Center recently reported that China will surpass the U.S. as the nation with the largest number of Internet users sometime this year. China recorded a staggering 53% increase in users from 137 million in December 2006 to 210 million in December 2007.

In case this still hasn’t sunk-in: China increased its internet users in one year by 73,000,000. The total number of U.S. Internet users is estimated to be 215 million – only three times China’s one year gain and only 5 million more total Internet users than China. With a population in excess of 1 billion, China clearly has plenty of capacity to not only catch-up but leave the U.S. in its dust.

With statistics like these, it is no wonder Google Inc. (GOOG), already dominate in Internet search in the rest of the world save for China and Russian, sees China as key to its future. At a conference in Boao, China Google China President Kai-Fu Lee was quoted in the Wall Street Journal as saying “Certainly, we would like to aspire to be a market leader in [China in] five years.”

Google has been making strides – increasing its Chinese Internet-search market share from 17% to 26% last year, but unfortunately for Google, the “Google of China” is not Google at all but a Chinese company called Baidu.com, Inc. (NASDAQ: BIDU).

Baidu.com dominates the Chinese Internet search market the way Google dominates the U.S. market. With over 60% market share, even Google admits it will be a tough road ahead. As Google's Kai-Fu Lee noted, “Gaining share against a well-established, supermajority competitor is a difficult proposition because there is a certain critical mass, economy of scale and word-of-mouth effect that one has to overcome.”

There are also two other critical elements that leave Google at a disadvantage to Baidu.com in this battle. The first is technological, the second is political.

Technologically, Google finds itself in the strange position of having an inferior search product in a market. As a Chinese-language search engine, Baidu.com is considered to be the leader with a more advanced algorithm that even allows users to search by phonetics – seemingly an arbitrary feature but actually quite important due to the difficulties of written Mandarin.

Politically, Google’s well-known mantra of “do no evil” combined with its U.S. roots are significant disadvantages in the Chinese market. There are already well-covered cases of the Chinese government demanding search filtering or disclosures of user information as the admission price to China’s huge Internet market. These pressures make it difficult for Google to keep face with its Western users, a problem Baidu.com doesn’t have. Also, culturally Chinese users may want to stick with Baidu.com as it is a native company - rare among the technology companies that dominate China’s landscape.

Certainly no one should flatly count Google out in a fight – already the company is attempting to capitalize on an agreement with China Mobile to provide search through mobile phones and thus gain on the Internet search market through the side door – but for now, Google is in the rare position of being the underdog.

So, with Google admitting China is the growth market and Baidu.com currently the dominate player – is Baidu.com a buy? Over the last 12 months, the stock has performed handsomely, maybe too handsomely, going from about $150 per share to more than $320 – for a price-to-earnings ratio of 113. With a triple-digit valuation, there are many people arguing that Baidu.com has great positioning but is simply overpriced.

However, as a crude but effective comparison borrowed from The Motley Fool shows, Baidu.com stock still may have a lot of legs left in it:


Google's U.S. market share: 60%
Baidu.com's China market share: 60%


U.S. Population: 300 million

Chinese Population 1 billion


Google's market capitalization: $173 billion
Baidu.com's market capitalization: $11 billion

Now, given the opening discussion of actual Internet users in China, clearly these numbers don't tell the whole story: China may have 1 billion people, but the number of those people with access to the Internet is much smaller – but the potential for growth is clearly there. Also, Google is renowned for its intangibles – such as innovation and the value of the 'Google' brand – besides simply trading at a much lower P/E multiple.

Still, Baidu.com has estimated earnings growth of 50% per year for the next 5 years on top of the simple size of the Chinese market – so there are many reasons to think Baidu.com is still a buy.