December 11th, 2017

Alibaba vs. Baidu: Which Chinese Stock is a Better Buy?

Chinese stocks such as Alibaba Holdings (BABA) and Baidu (BIDU) have more growth potential compared to their US-based peers. Will the world’s second-largest e-commerce platform BABA outperform China’s leading search and streaming engine BIDU? Read more to find out.

China has emerged as the fastest recovering economy from the pandemic and is projected to be the only economy to report year-over-year growth in 2020. Its recovery puts it ahead of the United States at the moment, as the latter is still struggling to contain the virus spread and curb unemployment.

China’s recovery is primarily due to increases in domestic consumer demand, as its exports segment remains significantly affected by the pandemic. China’s retail sales increased by 3.3% in September, and 0.9% in the fiscal third quarter. This compares to the 1% decline in retail sales in the United States over the three months. Hence, investing in Chinese stocks can be rewarding now.

Alibaba Holding Group Ltd. (BABA) and Baidu Inc. (BIDU) are two of the biggest companies operating in China. While BABA is the e-commerce king with a significant stake in cloud computing, BIDU has made its name as the biggest online search engine and streaming platform. Both these stocks are priced lower than US-based peers such as Amazon.com, Inc. (AMZN) and Netflix, Inc. (NFLX), but have higher growth potential, as they aim for global expansion, after dominating the domestic markets.

Both companies have generated decent returns over the past year. BABA gained 45.8% over this period, while BIDU returned 13%. In terms of past 6-month performance as well, BABA is the clear winner with 39.1% gains versus BIDU’s 31.6% returns. However, BIDU outperformed BABA’s negative returns over the past month by gaining 1.6%.

But which stock is a better buy now? Let’s find out.

Latest Developments

BABA recently made headlines for breaking all records by generating revenues of $74.10 billion from the 2020 11.11 Global Shopping Festival, up 26% from the year-ago value. Approximately $5.30 billion of the gross merchandise volume (GMV) was driven by the United States alone.

Earlier this month, BABA partnered with Richemont to promote luxury brands on their respective websites, ensuring greater access in the Chinese markets. Both the companies are heavily investing in Farfetch China Joint venture and Farfetch Ltd. in this regard.

On October 26th, BABA signed a Memorandum of understanding (MoU) with BMW to facilitate the digitization of auto sales. Under the agreement, both companies will jointly launch the first online sales and create a seamless online to the offline digital experience for premium auto brand BMW across the country.

As part of the company’s new retail strategy, BABA 72% direct and indirect stake in Sun Art Retail for $3.60 billion. All of Sun Art’s physical retail stores have been integrated with BABA’s Taoxianda and Tmall Supermarket platforms since the acquisition.

Apart from developing its e-commerce presence, BABA has also strengthened its position in the cloud computing sector. Alibaba Cloud, which has been named the third-largest Infrastructure-as-a-Service (IaaS) in the Asia Pacific region for three consecutive years by Gartner, extended its dominance to the global platform over the past couple of months. In the third quarter of 2020, BABA emerged as the leading cloud computing provider in China and accounted for 6% of the worldwide market. In September, BABA launched its first cloud computer.

BABA is currently eyeing the fast-growing Chinese EV sector, with a minority stake in Shanghai-based SAIC Motor. The company is also in talks to acquire BIDU’s iQIYI, which is currently on hold due to its higher valuation and regulatory restrictions.

BIDU, on other hand, increased its market presence by raising funds through a combination of debt and equity. On September 29th, BIDU partnered with CPE, Baidu Capital, and IDG Capital to raise $2.90 billion series A funding for its Smart Living Group business segment.

On October 6th, BIDU raised approximately $945 million in net proceeds for its senior notes offering. This is expected to fund the company’s general corporate expenses as well as any strategic expansion plans. Later in the same month, BIDU launched flagship smart assistant device Xiaodu Smart Display X10 and upgraded Xiaodu Earbuds. These products have tactical advantages over their industry competitors as they are priced significantly lower. Xiaodu earbuds sold out within 2 hours of its launch on BIDU World 2020, thereby multiplying BIDU’s revenues.

On November 17th, BIDU announced the acquisition of live streaming platform JOYY Inc. for $3.60 billion in cash.

Recent Financial Results

BABA’s revenues increased 30% year-over-year to $22.84 billion in the third quarter ended September 2020. Annual active customers increased 2% sequentially to 757 million, while mobile monthly active users (MAUs) in China increased slightly from the prior quarter to 881 million. Excluding Ant group share-based rewards, BABA’s income from operations rose 44% from the year-ago value to $4.37 billion. Non- GAAP EPS rose 37% from the prior-year quarter to $0.33, while non-GAAP net income grew 44% from the same period last year to $6.94 billion.

BIDU’s revenues increased slightly year-over-year to $1.16 billion in the third quarter ended September 2020. Operating income rose 161% from the year-ago value to $907 million, while net income grew 282% from the same period last year to $2.02 billion. EPS increased 286% from the prior-year quarter to $5.86 over this period.

Past and Expected Financial Performance

BABA’s revenue and EPS grew at CAGRs of 43.7% and 27.3%, respectively, over the past three years. BIDU’s revenue and EPS, on the other hand, increased at CAGRs of 9.4% and 10.5% respectively, over the same period. BABA’s net income rose at a CAGR of 29.4% over the past three years, while BIDU’s net income grew 9% over the same period.

Analysts expect BABA’s EPS to increase 54.2% in the next quarter (ending March 2021), 36.1% in the current year, 20.5% next year, and at a rate of 3.8% per annum over the next five years. The company’s revenue is expected to grow 65.6% in the next quarter, 46.5% in the current year, and 30.9% next year.

BIDU’s EPS is expected to rise 30.2% in the next quarter, 24.8% in the current year, 10.7% next year, and at a rate of 1.4% per annum over the next five years. The consensus revenue estimates indicate a 22.4% rise in the next quarter, 5.7% growth in the current year, and a 15.3% increase next year.

Profitability

BABA’s trailing 12-month revenue is 5.23 times what BIDU generates. However, BIDU is more profitable with a gross margin of 46.9% compared to BABA’s 43.8%.

Nonetheless, BABA’s ROE and ROA of 14.6% and 4.7% compare favorably with BIDU’s 11.1% and 2.8%, respectively.

Valuation

In terms of forwarding P/E, BABA is currently trading at 34.31x, 59.5% more expensive than BIDU, which is currently trading at 13.89x. BABA is also more expensive in terms of forward PEG (1.28x versus 0.80x) and trailing 12-month Price/Sales (8.64x versus 3x).

Furthermore, BABA’s trailing 12-month Price/Cash flow of 25.13x is 56.8% more expensive than BIDU’s 10.85x.

Thus, BIDU is the more affordable stock here.

POWR Ratings

Both BABA and BIDU are rated “Buy” in our proprietary POWR Ratings system. Here’s how the four components of overall POWR Rating are graded for both these stocks:

BIDU has an “A” for Trade Grade and Industry Rank, and “B” for Buy & Hold Grade and Industry Rank. It is currently ranked #17 out of 115 stocks in the China group.

BABA has a “B” for Buy & Hold Grade, Peer Grade and Industry Rank, and “C” for Trade Grade. It is currently ranked #14 in the same group.

The Winner

Despite being the biggest e-commerce platform in China, BABA is facing a bleak future, as it is neck-deep in government scrutiny. The Chinese government recently proposed an antitrust law against monopolistic practices, particularly in the tech sector. This caused BABA’s shares to tank, despite generating record revenues in the Singles day sales. This came in after the regulators suspended Ant IPO, which was projected to be the largest in history. The Ant IPO was expected to boost BABA’s growth significantly, as the company has a 33% equity stake in its fintech start-up.

BIDU, on the other hand, has emerged as the biggest search engine in China. With Google being banned in the country, BIDU has often been characterized as ‘China’s Google.’ Furthermore, its online streaming services platform IQIYI is one of the biggest in the world, often designated ‘Netflix of China.’ BIDU is currently aiming to expand its operations internationally, which should drive its earnings and revenue growth over the upcoming months. Thus, BIDU is the better buy here.

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BIDU shares were trading at $139.81 per share on Friday afternoon, up $3.81 (+2.80%). Year-to-date, BIDU has gained 10.61%, versus a 14.54% rise in the benchmark S&P 500 index during the same period.



About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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