Better Buy: Baidu, Inc. vs Alphabet

By Markets Fool.com

In a comparison of Baidu and Alphabet , or parent company of Google, in February, I concluded that both online search companies had the characteristics of stocks investors may want to consider buying, but I ultimately suggested that Alphabet was the better buy. With both companies recently reporting results, does Alphabet still look like the better buy?

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Metric

Baidu

Alphabet

Market capitalization

$62 billion

$498 billion

Trailing-12-month revenue growth (YOY)

33%

15%

Price-to-earnings

35*

29.5

Asterisk indicates price-to-earnings ratio is based on earnings after an adjustment to exclude Baidu's fourth-quarter benefit from its net gain from Qunar shares.

Growth

When it comes to revenue, Baidu remains the much faster growing company of the two, with trailing-12-month revenue up 33% compared to the year-ago quarter. Alphabet's revenue during this period increased just 15%.

The difference in the two companies' growth rates, however, isn't as large recently. In Q1, Baidu's revenue, excluding deconsolidated revenue from Qunar recognized during the period, was up 31% from the year-ago quarter. In this same period, Alphabet's revenue increased 17% -- or 23% on a constant currency basis.

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And Baidu's growth story loses even more of its gusto when looking at the trajectory of year-over-year growth rates. Baidu's year-over-year revenue growth rates are clearly decelerating, suggesting current growth may not be sustainable. Revenue increased 33% in Q4 compared to the year-ago quarter, and it increased 36% -- both higher than Baidu's adjusted year-over-year revenue growth of 31% in Q1. On the contrary, Alphabet appears poised to sustain its current growth rates. For instance, Alphabet's first-quarter revenue growth is about in line with Q4 growth, and it's even meaningfully higher than its 13% year-over-year revenue growth (or 21% on a constant currency basis) in Q3.

So, while Baidu is the faster growing company when measured by sales, the two companies' current growth trends suggest their rates of growth could come closer to converging in the future.

When it comes to growing profits, however, Baidu is the laggard. Baidu's adjusted net income in the first quarter, for instance was down 13.9% from the year-ago quarter. In the same period, Alphabet's adjusted first-quarter net income rose an impressive 17.6%.

Baidu's headwinds with profitability are driven by the company's aggressive and costly moves into faster-growing, lower-margin businesses, such as app market places and streaming video. While Baidu management anticipates the business will return to meaningful growth in profits over the the long hall, investors are going to have to deal with fast-growing costs for now.

So, even though Baidu's sales are growing faster, Alphabet is growing where it counts: on its bottom line.

Valuation

Interestingly, despite Alphabet's more impressive earnings growth recently, investors are still rewarding Baidu with a higher multiple to its earnings. It trades at a price-to-earnings ratio of about 35 after earnings are adjusted to exclude a fourth-quarter benefit from a net gain from Qunar shares. Google trades at a price-to-earnings ratio of 29.5.

Image source: Baidu.

Why may the market be awarding Baidu with a more favorable price-to-earnings multiple? It likely has something to do with Baidu's relative size in comparison to its addressable market. At a $62 billion market capitalization, the company is much smaller when measured by market value than Alphabet, which has a market capitalization of $498 billion; and with Baidu being the dominant search engine in the massive China market, investors may be hoping the company can take advantage of a fast-growing addressable market as more people come online with faster Internet speeds as the country develops.

Given the speculative nature of the thesis for Baidu's net income growth to pick up and for the company to successfully follow through on an uncertain market opportunity, investors may want to side with Alphabet over its Chinese counterpart. Alphabet looks comparatively compelling -- and not as risky -- as it continues to deliver strong revenue and net income growth for investors.

The article Better Buy: Baidu, Inc. vs Alphabet originally appeared on Fool.com.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Baidu. 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.