Tuesday, March 12, 2013

Why are Google, Baidu and Apple Good Buys?

It is quite interesting to see investors  project the future stock prices based solely on past prices. Of course, we might have some reasons to support target price that we already set for the stock in their minds. When Apple (NASDAQ: AAPL) reached $700 per share, many people projected that it would reach $1,000 soon. When Apple dropped to $500 per share, investors thought it might drop much further to $300. Similarly, now that Google (NASDAQ:GOOG) trades for $800 per share, many are speculating that it could easily reach $1,000.
Google and Baidu
Google is still considered the most dominant search engine in the world. According tocomScore, Google increased its search market share from 66.7% in December 2012 to 67% in January 2013. The second leading search entity was Microsoft, with a 16.5% market share. However, Google is not a leading search player in the world’s biggest market: China. Instead, the market leading search engine in China is Baidu.com (NASDAQ: BIDU). In the fourth quarter of 2012, Baidu’s market share in China was 78.3%, while the market share of Google stayed at only 16.7%. In the past six years, Baidu has experienced significant growth in both its top line and bottom line. Its revenue has grown from $280 million in 2007 to $3.58 billion in 2012. Its net income has also followed the rising trend, from $100 million to $1.67 billion in the same period.
With the Similar Valuation, but Baidu is More Profitable
At the current price of $89.73 per share, Baidu is worth nearly $31.4 billion on the market. The company is valued at nearly 13.9x EV/EBITDA. Google, on the other hand, is a much larger company with a $260.5 billion market cap. At the current trading price of $790.13 per share, Google is valued a bit cheaper, at 13.5x EV/EBITDA. Interestingly, Baidu seems to have a much more profitable operation than Google. Over the past 12 months, Baidu generated more than 49.5% operating margin, while the operating margin of Google was only 27%. Baidu’s return on invested capital was more than 47%, whereas the ROIC of Google was only 15.3%. 
Google – The More Innovative Company
However, Baidu has its advantages over Google in the Chinese market mainly due to Chinese regulations. Google is definitely a much more innovative company with a wider moat. Charlie Munger talked about Google’s moat a few years ago: “Google has a huge new moat.  In fact I’ve probably never seen such a wide moat. I don’t know how to take it away from them. Their moat is filled with sharks.”  In addition, Google employed little debt in its operation. As of December 2012, it had $71.5 billion in total stockholders’ equity, $6.2 billion in short and long-term debt, and more than $48 billion in cash. Its cash on hand accounted for more than 18.4% of Google’s total market cap. Meanwhile, $5.21 billion in cash and short-term investments represented only 16.6% of Baidu’s total market cap.
Apple Hidden Value Might be Unlocked Soon
Apple is also a technology giant that is famous for its huge cash hoard. With a total market cap of $421.6 billion, $137 billion cash on hand represented as high as 32.5% of Apple’s total market cap. Recently, David Einhorn has proposed a creative preferred stock distribution idea to effectively use Apple’s large amount of cash. He thought that Apple could issue around $500 billion in face value of preferred stock, paying 4% at no cost to existing shareholders. Just by doing that, Apple could unlock its potential value in its huge cash balance. As a result, Apple would be worth around $847 per share, an upside potential of more than 88.6%. Among the three, Apple seems to be the cheapest. At the current trading price of $449 per share, Apple is valued at only 6.34x EV/EBITDA.
My Foolish Take
Google, Apple and Baidu all seem to be good buys at their current prices with their own investment theses. Google is the most innovative company with great management and its global leading search engine. Baidu is a dominant search company in China, the world’s biggest market. Apple, with the lowest EV multiple and a huge cash balance, could be considered a value pick for now.  
Disclosure: Long Apple

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