Although Google Inc. (NASDAQ:GOOG), or should I say Alphabet Inc., is currently the reigning Internet king, a Chinese competitor called Baidu, Inc. (NASDAQ:BIDU) could usurp its position in the near future. Baidu is the leading search engine in China and has huge expansion plans into new product lines; a strategy that could launch the company’s share price to untold heights.
BIDU stock premiered in 2005 on the NASDAQ stock exchange, starting at a humble $27.00. Since then, shares rose to a peak of $245.00 in 2014, gaining nearly 807% over nine years before falling in recent months. This year’s stock market crash in China cost the company a substantial portion of its market value, but the firm’s upcoming strategy will diversify its revenue streams.
The company’s new focus is known within the industry as an online-to-offline push. While Baidu used searches to connect people with information (online), the new concept would connect people to real-world services (offline). In the same way that Uber provides access to independent drivers, and Airbnb links people with homeowners looking to rent, Baidu searches would let users fulfill their needs by pushing a button. (Source: Bloomberg, September 13, 2015.)
Google to Alphabet Was a Smart Move
Don’t get me wrong; I’m a big fan of Alphabet and I think the restructuring was well worth it. While operating under the Google banner, there was an obligation to circle all new products back to the company’s search engine business. But Google had outgrown such restrictive parameters, frequently expounding revolutionary concepts like self-driving cars and stratospheric balloons to broadcast Wi-Fi signals.
Reorganizing Google into Alphabet was a genius stroke. Like the Bell Labs and Xerox PARC of yesteryear, Alphabet will conduct the basic research needed to leapfrog humanity forward. Let’s not forget that eight Nobel prizes were awarded for work done at Bell Labs, including the invention of the transistor, which is a basic component of all electronics.
Alphabet’s plan is—dare I say it—visionary. It has the clout and intellectual capital to achieve incredible things, but how that translates to a higher stock price is uncertain. Basic research is an admirable goal and I applaud the spirit of continued innovation, but from an investing perspective, there are better options.
By contrast, Baidu is targeting an emerging trend in technology stocks that has demonstrable return on investment, making it the easy winner in a side-by-side comparison with Alphabet.
Why BIDU is a Better Stock Pick than GOOG
The architecture of Baidu’s online-to-offline push is because of long-time Chief Executive Officer, Robin Li. Li insists the O2O market is exploding in China as smartphones have become ubiquitous and people face a scarcity of time. Imagine the peace of mind gained when you order dinner, get your laundry done, and book movie tickets, all while stuck in a horrific traffic jam. Road congestion is a very serious issue in China and it eats up a lot of time for the average Chinese citizen.
O2O services help provide flexible planning for everyone. But America isn’t leading the way on this opportunity. Sure, we invented Uber, but Baidu brought Uber into China and decided to expand the model to everything. So far, American investors haven’t shown him much love for the ambitious investments.
“It’s kind of difficult for a typical U.S. public market investor to really understand why Baidu is losing so much money on those unproven businesses,” Li said. “We have a better understanding of this market. We think this kind of investment will pay off. So there’s a little bit of education needed.”
Yes, Baidu’s operating margin was 21% in the second quarter, down from 52% three years ago, but that’s a cost of doing business. Alibaba Group Holding Limited (NYSE:BABA) and Tencent Holdings Ltd. are deep-pocketed competitors also investing heavily into O2O.