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What if I told you that I was silly enough to put a whopping 30% of my family's real-life holdings in just two stocks? Sounds pretty silly, doesn't it? And yet, that's exactly the case with shares of Amazon.com(NASDAQ: AMZN) and Baidu (NASDAQ: BIDU).
Mind you, I never intended for it to be this way. In fact, we've put nowhere near that amount into these investments. They've simply sat and grown at much faster paces than we expected over the past decade.
So you can imagine how difficult it is for me to determine which is the better buy today. While there's no ironclad way to answer that question, we can gain some insight by comparing them through three different lenses.
Some people think that having cash sit in the bank is a ridiculous use of money. Sure, it's not as sexy as paying a dividend, buying back shares, or reinvesting in the business, but companies that keep a reasonable amount of cash in the bank are the ones that not only survive but thrive.
That's because every company will experience rough patches in their corporate lives. When those patches are met with robust war chests, companies have options: They can outspend their rivals, buy back shares on the cheap, or even make strategic acquisitions.
Those who haven't been tending to their reserves -- and instead have taken on debt -- are in the opposite boat. They have to struggle just to make ends meet, as they are often caught in the unenviable position of being at the whim of their creditors.
Here's how these two stack up in terms of financial fortitude.
Data source: Yahoo! Finance, SEC filings.
Both of these companies are on very solid footing. It's important to keep in mind that Amazon is currently valued at roughly six times the size of Baidu.
Taking this into consideration, it's pretty clear that if forced to choose a more robust company, we'd have to side with Baidu. The company's cash-to-debt ratio is more favorable, and it brings in more income and free cash flow (FCF) -- relative to its size -- than Amazon.
Winner = Baidu
Sustainable competitive advantages
Commonly referred to as a "moat" in investing circles, a company's sustainable competitive advantages are what truly set it apart from the rest of the field. Over time, this has emerged as the most important predictive metric in my own investments. And both of these companies have enviable moats.
Baidu benefits from massive search engine market share in China. Currently, it has twice as much mobile search market share as the next closest competitor, and it has captured an incredible 80%of all search advertising dollars.
But the lasting moat takes two forms for Baidu. The first is simply the power of the company's brand. As Baidu continues to be the default search engine for Chinese citizens, the company captures an incredible amount of data on users, which allows it to offer targeted ads that others can't match.
The second wing of the company's moat is in its online-to-offline (O2O) investments. While still in its nascent stages, this would enable Baidu to not only become engrained in the everyday life of Chinese citizens but also the businesses that serve them.
Amazon, on the other hand, benefits from a massive and expanding moat. The company has an incredible number of fulfillment centers around the world (over 100), and these multimillion-dollar centers allow the company to offer the type of convenient two-day -- or less -- delivery that no other company can match.
Additionally, Amazon is benefiting from massive network effects with third-party sellers. The more these vendors sell on Amazon, the more that customers are incentivized to buy through Amazon. It's a virtuous cycle.
As a cherry on top of the moat, the sheer size of Amazon Web Services allows the company to leverage its computing capacity to offer low prices to cloud customers while reaping the benefits of profitability through scale.
While Baidu has a solid moat, Amazon's is simply more powerful.
Winner = Amazon
Finally, we have valuation. While this isn't an exact science, there are some straightforward metrics we can consult to give us an idea of how expensive each stock is.
Data source: Yahoo! Finance, E*Trade. P/E represents figures from non-GAAP earnings.
Here, it would be difficult to make a case for Amazon. While calling the stock "expensive" has caused many to miss one of the greatest wealth-producing machines of the past two decades, Baidu's stock seems to be the safer bet. Wall Street has been turned off by the fact that O2O investments have dampened earnings, but I think there's long-term potential there that's underappreciated.
Winner = Baidu
Final call = Baidu
So there you have it: Baidu wins by a hair. But don't be mistaken. At the end of the day, both of these companies deserve strong consideration from interested investors -- and they'll continue to be cornerstones of my family's own holdings.
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