Baidu vs. Google: Which is the Better Investment?

Google is the top search brand in the Western world, but things are very different in the Eastern world. In Asia, especially East Asia - Sogou, Qihoo, and Naver are among the search engines users turn to first. Investors believe these search engines have a chance to replace the aging Google, but Baidu is seen as the most likely candidate to take over Google's position. The question is, which one is the better choice?

Baidu dominates China's Internet search market, and most of the time, Google controls more than 70% of the search market in North America. However, these two companies are not entirely alike, and investors enjoy having diverse options.

The Legend of Two Search Giants

If we consider the recent stock prices of the two companies as an indicator, then Baidu is the top stock favored by many traders. Its stock price rose from $94.60 per share at the end of June to the current $131.00 per share. This represents a 38% increase compared to the lack of progress for Google's stock in July.

There are two reasons driving the rise in Baidu's stock price: acquisition news and solid earnings reports.

On July 16, Baidu announced that it invested $1.9 billion to acquire a controlling stake in 91 Wireless. Since entering the app download business, 91 Wireless reached a download volume of 10 billion in 2007. This acquisition cost 40 times the company's revenue in 2012. It wasn't exactly a bargain, but considering that major companies are competing fiercely in China's Internet market, Baidu could have made worse deals. Regardless, the market clearly favors this transaction.

Just a few days later, Baidu released its second-quarter financial report, showing a 39% year-over-year increase in revenue with earnings per share of $1.22, slightly less than a few cents compared to the second quarter of 2012 but exceeding the expected earnings of $1.21.

As for Google, it didn't have its best second quarter. Earnings per share fell from $10.12 last year to $9.56. The market did not anticipate the price drop, leading to a decline in Google's profits despite a 19% increase in revenue.

Based on recent developments, new investors might choose Baidu over Google. However, this may not be the right move.

Google Still Dominates the Market

With Baidu's stock price rising, traders will wait for a safer entry point. Even if Baidu's stock cools down and reorganizes, Google will remain a strong competitor.

This is not a clear-cut market. China's rapid adoption of the Internet era and the smartphone era continues to accelerate, while the growth of smart devices in the U.S. is slowing down. Reports suggest that out of China's 1.3 billion population, approximately 246 million devices are connected to the Internet. In contrast, there are 221 million smartphones and tablets available for use among the 300 million people in the U.S. These figures indicate that Baidu has greater and better opportunities to tap into business, especially now as it enters the competitive mobile market. However, Google still holds a relative advantage.

While Baidu remains China's top search engine, young and promising Qihoo has threatened Baidu's dominance in the past 12 months. As of June 2012, Baidu held 81% of China's online search market, while Qihoo had no presence. However, a year later, 15% of Chinese Internet users chose Qihoo as their search engine, leaving Baidu with only 69% of the search market share. That said, the new battleground will be in the mobile sector (mobile device search and advertising), where Baidu is building a massive war machine. Google's is still better because it has more experience in the mobile field.

Not only does Google have its own mobile search site, but it also owns the platform that powers these devices - Android. The acquisition of 91 Wireless will undoubtedly play a significant role in Baidu establishing its own app store, but Google and Apple remain the dominant forces on the stage since most of the devices Chinese consumers use to access the Internet run on systems they produce.

Google has also made breakthroughs in the hardware market. There's its Nexus product line and the Chromecast TV dongle. Although the future of Google Glass is unclear, there is no doubt that Google will find ways to make money. Baidu, on the other hand, has no hardware products.

Google's main advertising business did indeed decline somewhat last quarter. But Google's vision is to integrate every aspect of your life—not just tightly (even if it's somewhat creepy)—and as the company continues to innovate, advertising revenue will certainly increase. Meanwhile, Baidu is currently doing many things, expanding through acquisitions, and it may take a few more years to transform itself into a comprehensive tech company like what Google has done in the Western Hemisphere.