Google (NASDAQ:GOOG) continues to reign supreme in the internet search industry across most of the world, but China and Russia lie firmly in the grasp of local search giants Baidu (NASDAQ:BIDU) and Yandex (NASDAQ:YNDX) respectively. While Google has been presented with an economic recovery of sorts in the US and the rest of the world, China and Russia are grappling with their own set of problems. Could global developments transform the landscape of this industry into a one horse race?
We look at the industry with a special focus on the Google, Baidu and Yandex, as we compare their revenue growth, profitability and valuations.
Internet Search Industry: The Regional Dynamics
Yahoo, one of the pioneers of the industry is plotting a comeback. Yahoo is developing its own search technology with the aim of eventually breaking away from its partnership with Microsoft, one that is scheduled to last until 2020. Bing which powers Yahoo’s search has entered into content integration deals with the likes of Facebook, Twitter, OpenTable (online restaurant reservation service) and Yelp (online business listing and review site). While the Yahoo Bing space is an interesting one, it’s too early to call how things will shape up eventually.
At the end of 2013, Yandex edged past Google in Belarus and accounted for 30% of the market share in Ukraine. It also makes English and localised versions available to users in Turkey and Kazakhstan.
Google, Yandex and Baidu: Comparative Stock performance
Since the beginning of 2014, Google, Yandex and Baidu have all hit their 52 week peaks. But their individual stories have changed substantially since then. While Yandex has found itself knotted up in Russia’s march to annex Ukraine’s Crimea region, Baidu has been a victim of China’s economic slowdown.
Even as Google has stayed within arm’s length of its 52 week high, Yandex and Baidu have fallen by 36% and 12% respectively from their 52 week peaks, with corrections of 8.4% and 4.6% respectively on March 13, 2014.
|1 year stock return* (in %)||44.7||22.3||92.4|
|2 year stock return** (in %)||38.9||10.0||10.3|
|3 year stock return** (in %)||27.8||NA||10.2|
|Current stock price (in $)||1,189.1||29.2||166.1|
|Market Cap ($ billion)||399.6||10.2||58.1|
* Absolute return ** Compounded annual growth rate (CAGR)
If long term return is the criteria, even though Baidu looks promising, Google is consistency and stability incorporated.
The ‘Search’ for Revenue and Profitability
While all 3 companies in question have an exceptional track record, Baidu comes across as the most promising one of the lot with staggering revenue growth and profitability over the last 3 years.
|2013 Revenue (in billion USD)||59.8||1.2||5.2|
|YoY Revenue growth* (in %)||19||28||44|
|3 Revenue growth** (in %)||27||43||64|
|2013 Operating profit margins (in %)||23||32||36|
|3 year average (in %)||27||33||46|
|2013 Net profit Margins (in %)||22||34||34|
|3 year average (in %)||23||30||42|
For Yandex, the source of concern is that Russia could find itself on the wrong side of economic sanctions imposed by the European Union, the ramifications of which could be far reaching.
As for Baidu, the news that China’s retail sales and factory output have fallen to multi-year lows has come just days after the first default on a corporate onshore bond by a Chinese company.
Both Yandex and Baidu have established their local dominance owing to their ability to provide local language search results, a critical factor in their respective geographies. So, it’s unlikely that Google will be able snatch away their market shares in Russia and China. However, an economic downturn comes with lower discretionary spends, and one of those is advertising, the major source of revenue for these search giants.
Google, Yandex and Baidu: Returns on Investment and Current Valuations
If you have been following some of the internet companies that are doing the rounds, these numbers should tell you why we love these three companies.
|Return on Equity (ROE) (in %)||16||32||31|
|Return on Invested Capital (ROIC) (in %)||41||44||115|
Be it Google, Yandex, or Baidu they all deliver exceptional revenue growth and profitability as routinely as they deliver search results. And if you go by their track record, there isn’t much to choose between them. However, in the light of the recent events, one would probably weigh them on the basis of risk appetite.
Both Yandex and Baidu have their sights set on the Middle East and if their plans materialize, it would help them reduce their geographical sensitivity. But until then, for those with the conviction to rough it out, these could turn out to be great value picks in the time to come. However, for those who prefer the comfort of stability, the search will end at good old Google.