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What China Means to Google

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Analysts weigh in on the impact to the search giant and its competitor Baidu.

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Google (GOOG) is making headlines this morning after the company warned it would stop censoring its search results in China and it may pull out of the country completely.

(See also, Two Ways to Play: Google May Get Out of China)

Google discovered that computer hackers broke into the computers of at least 20 major US companies and gathered information about human rights activists who were trying to shine light on China's alleged abuses.

Google officials plan to hold talks with the Chinese government to see if there's a way the company can provide unfiltered search results in the country. According to reports, if an agreement can't be reached, Google will pull of the country.

The story is having a huge impact on the shares of Google and the Chinese search engine Baidu (BIDU). In early morning trading Google was trading down 2.05% while Baidu was up 11.79%. Of course, most Wall Street firms are out with research giving their take on the story -- here's a look at their opinions:

  • Citigroup believes that it would be hard for Google to remove itself from potential possibilities in China over the long-term. In 2010, Citi estimates Google's 2010 revenue from its Chinese business could be around $300 million to $350 million, or 1.5% of total expected 2010 revenue. As for EPS, Citi sees Google earning $27.12 Non-GAAP EPS in 2010, with basically no material impact from China on the bottom line.

  • Jefferies believes that Google's revenues will be affected by 1% to 2% for the full year of 2010. However, it said the inability for Google to participate in one of the largest and fastest growing markets would be a long-term strategic loss.

  • Stifel Nicolaus estimates that Google has a 31% search query market share in China and a 25% share of the search dollar market in China. Using these numbers, it estimates that in 2009 Google had revenue of $215 million from China, or less than 1% of Google's revenue.

  • UBS upgraded Baidu to Buy from Neutral and raised its price target to $523 from $380. UBS believe that Google.cn (Google's China Version) will be shut down as its channel checks show Google has already removed the censoring filters for several key words. Even if Google doesn't pull out, UBS believes advertisers will have concerns about spending with Google.cn. They see this as an obvious win for Baidu as it would become the dominant player in the Chinese search market.

  • Finally, Deutsche Bank upgraded Baidu from Hold to Buy because of valuation and the tension between Google and China are positive for the company.


It seems as if Google's China loss is Baidu's gain as the Chinese search giant would have a virtual monopoly on the Chinese search market with a share of 90% of revenue and 95% of all traffic -- hence the positive reaction in shares today.

(See also, Handling Google's Possible Exit From China)

That said, it seems as if Google had yet to make money in the Chinese market and no real impact will be seen on 2009 and 2010 EPS, so the reaction in share price may be over exaggerated. The issue is more of a loss of future business as Google and Baidu were a duopoly in one of the world's largest markets.

Also, watch for reaction in other China-based names: Sohu.com (SOHU), Sina (SINA), Changyou (CYOU), and Netease (NTES) on the premises that Google's loss is also their gain.

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No positions in stocks mentioned.

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