Baidu Inc. vs Yandex Inc: Which "Google Wannabe" Will Succeed?

By Markets Fool.com

Chinese search giant Baidu and Russian search engine Yandex are often called the "Googles" of their home countries. But since the beginning of the year, shares of Baidu and Yandex have respectively dropped 11% and 15%, while shares of Google parent Alphabet have only slipped 6%. Let's see what's happening with both companies, and which one has the better chance of following Google's evolution into a tech superpower.

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Source: Pixabay.

Baidu at a glance
Baidu became the dominant search engine after Google quit the mainland Chinese market in 2010 after a dispute with the government. Today, Baidu controls around 70% of the Chinese search market, according to China Internet Watch, and offers a wide range of search, mail, mapping, cloud, streaming video, and e-commerce services.

During the third quarter, Baidu's revenue rose 36% annually to $2.9 billion. That growth was supported by a 21% increase in its number of online ad customers and 9% growth in revenue per customer. Gross merchandise volume (GMV) -- which includes Qunar's travel services, Nuomi's daily deals, and Baidu's Takeout Delivery service -- surged 119% to $9.5 billion. Total users of its online payment platform Baidu Wallet spiked 520% to 45 million.

However, Baidu's net income declined 27% annually to $447 million due to bigger investments into expanding its O2O (online to offline) ecosystem. Baidu's addition of new O2O features into its core mobile app enables users to make reservations, buy movie tickets, and buy things within a single monolithic app. Baidu also established anInternet bank with Citic Bank, launched a Siri-like assistant called Duer, and promised to invest $3.2 billion in Nuomi over the next few years. These investments widen Baidu's defensive moat against its top rival Tencent, but also weigh down its earnings.

Baidu's Duer. Source: Baidu.

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On the bright side, Baidu's traffic acquisition costs (TAC) held steady at 13.1% of its total revenues, compared to 12.9% a year earlier. Baidu also bought back $1 billion in shares during the third quarter and authorized a new $2 billion buyback program over the next two years -- which should soften the blow of its rising expenses.

Yandex at a glance
Although Google remains active in Russia, Yandex is still thecountry's largest search engine, finishing its fourth quarter with a 57.3% share of the market -- up from 57.1% a year earlier. The company also offers its suite of search, mail, mapping, and cloud services in Belarus, Kazakhstan, Ukraine, and Turkey.

Last quarter, Yandex's revenue rose 23% annually to 18.09 billion RUB ($248 million). Search queries in Russia climbed 5% while its total number of advertisers rose 24%. Text-based ad revenues rose 23% and accounted for 90% of Yandex's top line, but display ad revenues remained flat. Paid clicks on Yandex and partner sites rose 10%, while the average cost per click rose 12%.

However, Yandex's adjusted net income fell 8% annually to 3.6 billion RUB ($49.8 million), due to a 20% increase in TAC. As a percentage of revenues, Yandex's TAC rose from 20.6% to 21.1% between the fourth quarters of 2014 and 2015. Yandex hasn't been as aggressive as Baidu with O2O initiatives, but it expanded its ecosystem with the price comparison app Yandex.Market, ride-hailing app Yandex.Taxi, and car shopping site Auto.ru last year. Unlike Baidu, Yandex didn't repurchase any stock last quarter or initiate fresh buyback plans.

Source: Pixabay.

Yandex notably filed an antitrust complaint against Google last February, claiming that the search giant's pre-installation of first-party apps on Android devices was anti-competitive. Russian regulators ruled in Yandex's favor in September, but Google appealed theruling. Yandex hopes that the case, which could give it a mobile edge against Google, will be settled by the end of 2016.

Tailwinds and headwinds
Baidu and Yandex both signed a deal with Microsoft which made them the default search engine forWindows 10 in their main markets. That deal could make it tougher for Google to return to China and help Yandex extend its lead over Google.

Both Baidu and Yandex's home markets face near-term macro challenges and currency depreciation. However, the problems in China are much less severe than those in Russia, where the ruble plunged over 50%against the dollar over the past two years due to the decline in oil prices and economic sanctions. Russia's GDP also contracted 3.8% annually in the fourth quarter of 2015, while China's GDP grew6.8%.

Baidu currently trades at 32 times earnings, which is considerably higher than Yandex's P/E of 14 and the industry average of 28. However, Baidu's sales growth is stronger, it has lower TAC, and it is based in a more stable market. Yandex hedges against forex fluctuations by splitting its cash in rubles, dollars, and euros, but I personally don't have enough confidence in the Russian economy to invest in its top search engine yet. Therefore, I believe that Baidu has a better chance of bouncing back than Yandex this year.

The article Baidu Inc. vs Yandex Inc: Which "Google Wannabe" Will Succeed? originally appeared on Fool.com.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Baidu. The Motley Fool recommends Yandex. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.