Alibaba Group Holdings Limited (BABA) and Baidu, Inc. (BIDU) are two of the biggest Chinese tech giants. BABA is known as the ‘Amazon of China’ and operates through four major segments—Cloud Computing, Digital Media, Innovation and Core Commerce. BIDU is a Chinese language Internet search provider that offers a Chinese language search platform on its website.
While many countries are still struggling to fully recover from the COVID-19 pandemic, China has recovered rapidly. Major Chinese tech giants are also making their presence felt in the global economy, but at the same time are facing increasing regulatory controls from Chinese authorities. However, since technological advancements are happening now on almost a regular basis, both BABA and BIDU should witness increasing demand for their products and services.
While BIDU has returned 114.4% over the past year, BABA has gained 13.9%. In terms of their past-month’s performance, BIDU is a clear winner with 3.8% returns versus BABA’s 2.4%. But which of these two stocks is a better pick now? Let’s find out.
This month BABA announced that it had suffered an Administrative Penalty Decision issued from the State Administration for Market Regulation of the People’s Republic of China after an anti-monopoly probe found the e-commerce giant had abused its dominant market position for several years. Alibaba accepted the penalty and said it will comply with the regulator’s determination. On April 26, 2021, affiliated companies Ant Group and Tencent both announced further cooperation with China’s central bank to move forward with the country’s digital yuan, vowing to provide active support to currency’s the roll out.
Jidu Auto, an electric vehicle venture between BIDU and Chinese automaker Geely (GELYF), announced on April 23 that it aims to plow 50 billion yuan ($7.7 billion) into producing smart cars over the next five years. This should increase Baidu’s revenue margin significantly. Today, Baidu MEG unveiled its new X+Y strategy to advance intelligent search through “servitization” and “humanization”, and Baidu App announced a new brand slogan, “Baidu for a Better Life”, as part of its efforts to support content creators and developers deliver superior end-to-end experiences to users and diversify its income stream.
Recent Financial Results
BABA’s revenue increased 36.9% year-over-year to RMB 221.08 million for the quarter ended December 31, 2020. Its operating Income came in at RMB 49 million, which represents an 19.3% year-over-year increase. The company’s net income increased 55.5% year-over-year to RMB 78 million. And its EPS has increased 48% year-over-year to RMB 3.61 million.
For its fiscal year 2020 fourth quarter, ended December 31, BIDU’s revenue increased 4.8% year-over-year to RMB 30.30 million. Its operating income increased 6.9% year-over-year to RMB 5 million, while its adjusted EBITDA increased 4.8% to RMB 8.60 million.
Past and Expected Financial Performance
Analysts expect BABA’s revenue and EPS to increase 68.1% and 35.9%, respectively, year-over-year for the quarter ending March 30, 2021. For the quarter ending June 30, its EPS is expected to increase 18.1% year-over-year. Its EPS is expected to grow 23.9% for the current year and 9.3% next year. Its revenue is expected to increase 39.2% for the current year 30.9% next year. The company’s EBITDA grew at a 19.7% CAGR over the past three years. And its EPS is expected to grow at a rate of 9.3% per annum over the next five years.
In comparison, analysts expect BIDU’s revenue and EPS to increase 30.1% and 33.3%, respectively, for the quarter ending March 31, 2021. Its EPS and revenue for the quarter ending June 30, 2021 are expected to increase 12.8% and 21.1%, respectively, year-over-year. Its EPS is expected to grow 4.7% for the current year and 20.6% next year. Its revenue is expected to increase 19% for the current year and 13.9% next year. And its EBITDA grew at a 4.3% CAGR over the past three years. Furthermore, BIDU’s EPS is expected to grow at a rate of 20.6% per annum over the next five years.
BABA’s trailing-12-month revenue is 6.02 times BIDU’s. However, BIDU is more profitable, with a 49.6% gross profit margin versus BABA’s 43.3%.
BABA’s ROE and ROA of 15.7% and 4.5%, respectively, compare favorably with BIDU’s 10.4% and 3.1%.
In terms of forward non-GAAP P/E, BABA is currently trading at 22.86x, 10.3% higher than BIDU, which is currently trading at 20.72x. Moreover, BABA is more expensive in terms of trailing-12-month P/S (6.12x versus 4.10x).
In terms of trailing-12-month price-to-book, BABA’s 4.39x is 66.3% higher than BIDU’s 2.64x.
So, BIDU is the more affordable stock.
BABA has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. However, BIDU has an overall B rating, which represents Buy. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
BABA has a C grade for Value, which is consistent with its 4.13x forward price-to-book ratio, which is higher than the 3.77x industry average. However, BIDU has a B grade for Value, which is in sync with its 2.23x forward price-to-book ratio, which is lower than the 3.01x industry average.
Also, BABA has a C grade for Momentum, in sync with its 2.4% gains over the past month and 24.2% loss over the past six months. BIDU has a B grade for Momentum, which is justified given that it has gained 62.8% over the past six months and 3.8% over the past month.
And, of 80 stocks in the China group, BABA is ranked #25 and BIDU is ranked #10.
In addition to the POWR Ratings grade we’ve just highlighted both BIDU and BABA are rated for Growth, Stability, Sentiment and Quality. Click here to see the additional ratings for BABA. Also, get all BIDU’s ratings here.
While both BABA and BIDU can be considered good long-term investments given their market dominance in the Chinese tech industry, we think BIDU is better positioned based on its higher growth potential and relatively lower valuation.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about other top-rated stocks in the China group.
BIDU shares were trading at $216.40 per share on Tuesday afternoon, down $0.06 (-0.03%). Year-to-date, BIDU has gained 0.07%, versus a 12.04% rise in the benchmark S&P 500 index during the same period.
About the Author: Ananyo Guha Niyogi
Ananyo’s ardent interest in capital markets, wealth management, and financial regulatory issues, led him to a career as an investment analyst. His goal is to educate individual investors by making complex financial issues easy to understand. More…
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