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What it Means if Google Is Out of China


How will competitors, such as Baidu, fare?

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

I keep getting lots of questions about whether I think Google (GOOG) is out of China. My response is the same: I don't think it matters much to my bullish thesis for Google and bearish for Baidu (BIDU). However, if Google stays, Baidu will peel hugely and Google should pick up $25-$40.

As far as Google leaving, it still has plenty of avenues for growth and when it does reenter China (or figure out how to monetize "real" China searches without officially being there) it will be in a much better position.

As for Baidu, just think about this: Some analysts have baked in the extra $200 million to $400 million per year from Google's exit. Its forward price/sales ratio is over 13 and its forward PE is over 40. That may seem okay with revenue growth of 45%, but you have to believe it will keep growing. Frankly, if search in China is that rock solid and seems to grow at 45% "perfectly" year over year for many years then Baidu isn't too rich. But it's also not a steal, especially with names like Apple (AAPL) with similar growth and trading about two-third's cheaper and you can fully trust the accounting.

Moreover, what about new entrants in the Chinese search market? What about China's growth slowing? What about all the nefarious search activity on Baidu that they currently monetize and are trying to quell? Can't Microsoft's (MSFT) Bing pick up China searches? How about Alibaba?, or even (Vivisimo) might make a strong push into China. Could Apple get into mobile search, which I think will be the absolute best search market in China. Again, can't Google monetize on traffic on the traditional Google? I don't see why not as it's easy enough to change the language translation on Google to Chinese.

Bottom line, even upon Google's exit I still see many things that could stand in the way of Baidu rising materially higher. Ancient Chinese proverb -- "trees don't grow to the sky!"

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Position in MSFT, AAPL, GOOG, BIDU

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