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When the pundits are all singing the same song, I say it’s time to move on.
Right now they are all taking pot shots at Google (GOOG). CNBC’s Jim Cramer slams Google because of the company’s decision to put China on the back burner. The experts on television and the Internet warn that Goggle has followed Microsoft (MSFT) into middle age, and faces a dull future.
Hogwash.
Those who are down on Google now say that China’s leading search engine, Baidu (BIDU) is a better bet. I say it’s a risky bet.
I’ve got nothing against Baidu. In fact it was one of my best calls was when I recommended a buy of Baidu shares one year ago. Back then, the stock was trading at a level of more than $350 a share. After a ten-for-one split, Baidu is now selling at more than $73 per share. That’s a gain of more than 100%.
Baidu cheerleaders boast that the company is expanding in the world’s fastest growing Internet market. True enough. A new report says the number of Internet users in China has soared past the 420 million mark! That’s a huge number, and it is growing. But, that does not mean investors should sell Google and buy Baidu at any price.
The Contrarian View
Google investors took a big hit last week when the company issued its Q2 earnings report. Shares prices plummeted by $34.41, shedding almost seven percent of their value in Friday’s trading.
It has been a rough year for Google. Shares have lost more than 25 percent of their value. That’s worse than the NASDAQ and even worse than Microsoft’s performance. But Baidu has performed like a champion by comparison.
Now, one of my competitors is advising clients to back up the truck and buy more Baidu. Here’s his pitch: “Last quarter, BIDU posted a whopping 165% surge in net income. Sales also rose by an incredible 60%, blowing past analysts’ expectations and resulting in a 33% earnings surprise. The stock jumped 14% on that news and a repeat this quarter should do the same.” So he says.
But not so fast! Baidu’s chart suggests that the days of endless share price gains may have ended. Over the past quarter, prices found a peak above $80 and became range-bound at best. Technical indicators suggest an ongoing easing of Baidu’s peak prices.
What about the chance of another earnings surprise? Baidu’s P/E multiple of 96.75 suggests that huge earnings increases are already built in to the stock’s valuation. A forward P/E valuation of 37.32 also suggests great future expectations are already priced in.
When a stock is this highly valued, anything short of a revenue jackpot could obviously result in a severe drop.
Take a look at Google’s recent plunge. Before its earnings announcement Google shares sported a relatively modest 22.39 P/E multiple.
And what was the shocking news that caused Google to lose almost seven percent of its value? Profits increased! Google posted a profit of $1.84 billion, up from $1.49 billion a year ago. Revenue jumped to $6.82 billion from $5.52 billion.
More than a billion dollars in new revenue weren’t enough to support Google’s modest valuation. A one percent increase in operating costs, and a miss of few cents on earnings per share, spooked the market.
To say the least, markets are extremely nervous.
What the Cheerleaders Don’t Tell You
Starry-eyed Baidu boosters are not telling you how thin the ice is. Sure, income may be up by 165%. But Baidu’s total income barely made it above $70.4 million in the last quarter.
China’s Internet population may be huge, but Baidu’s profit of $70.4 million isn’t even in Google’s billion-dollar league.
Critics like Jim Cramer claim that Google is missing out on hundreds of million of dollars worth of profits in China. But Google had only 30 percent of the Chinese market and it has not exited China entirely. What’s more, Baidu’s profits suggest that the prize is simply not yet all that large yet.
How is that possible? My research into Chinese Internet marketing suggests there are two key problems. The Chinese people are not yet accustomed to buying and advertising goods online. That’s one reason that Baidu’s Internet sales were only $189.6 million in their latest quarterly report. Compare that to Google annual revenues of $6.82 billion. Marketing experts say that Baidu has not mastered advertising on the web nearly as well as Google has.
The best way to compare the real valuation of the two firms is to look at the price-to-earnings-growth ratio (PEG). The PEG ratio shows investors are now paying almost twice as much for Baidu’s earnings growth as they are for Google’s.
Baidu’s PEG is a very high 2.02. Google’s PEG is a surprising 1.03!
Those who compare Google to tech dinosaurs like Microsoft are ignoring the differences. Every computer user knows very well that the Microsoft is struggling to produce new operating systems and software that anyone wants.
Meanwhile Google’s new products are being snapped up around the world. The Android OS for cell phones is quickly catching up with the iPhone in global popularity and is supported by many more telecom companies. Google’s other products are constantly being upgraded. The firm’s increased operating expenses in the last quarter were related to the purchase of valuable advertising companies like AdMob.
Google didn’t become a “mature” company or a tech dinosaur when its earnings crossed the billion dollar mark. It is still one of America’s technology leaders and is still growing earnings aggressively.
Right now I believe that Google is dirt cheap compared to Baidu.
Forget about investing with your eye on the rearview mirror. Baidu’s past performance is impressive. But now it is priced for huge success, or for huge disappointment if it misses expectations by even a fraction.
Baidu carries frightening risk at today’s valuation. But Google has been beaten down to a point where the chances of investor rewards with this tech leader are obviously greater and the risks are smaller.
I’m ignoring the talking heads. I’m selling Baidu and buying Google.
Sunday, August 8, 2010
Saturday, August 7, 2010
Apple Invades China! World’s Biggest Market Potential
Why should investors care about Apple’s (AAPL) invasion of China? After all, the company’s first store opened in Beijing two years ago. Sales of the iPhone by China Unicom (CHU) have been disappointing.
Try taking a hint from the Chinese.
The opening of the new Apple store in Shanghai over the weekend was spectacular. Thousands of Chinese Apple enthusiasts walked, drove, and flew in to attend the event at the foot of the Oriental Pearl Tower on Saturday.
The new store is a stunner. Under a forty-foot glass cylinder sprawl 16,000 square feet of sparkling retail space. With 175 employees, the Shanghai flagship store will have the largest “Genius Bar” assisting customers in the world.
The Shanghai opening matters because it signals that Apple is finally getting serious about the Chinese market. China is the second largest PC market in the world but so far Apple has barely made a dent.
The CEO of Lenovo (LNVGY) joked with Shanghai Daily, saying, “"We are lucky that Steve Jobs has such a bad temper and doesn't care about China. If Apple were to spend the same effort on the Chinese consumer as we do, we would be in trouble.”
Apple is the world’s largest technology company by market cap but that doesn’t mean it will ruin Lenovo’s business. That’s not the strategy.
APPLE GETS SERIOUS
The throngs attending the Shanghai store opening demonstrate something that Apple learned with its stores. New stores create buzz.
Selling Apple’s high-end products depends on clever marketing. This will be especially important in China where average salaries are lower than in most of the company’s established markets.
That’s why Apple intends to open 25 stores throughout the country by the end of 2011. That’s a major push even by Chinese standards.
Apple won’t say where the stores will be established but there are already rumors flying around Shanghai that a second store will open there in a popular high-end mall.
Doubters point out that Lenovo computers are sold through 10,000 retail outlets. By that standard the Apple invasion may seem tiny.
But Apple is targeting a surprisingly large contingent of upper middle class buyers. With Apple’s 23% profit margins, there’s a lot of money at stake.
Buzz is also critical to iPhone sales. China Unicom has sold only a million iPhones. But another two million have been bought on the grey market from tourists and smugglers.
Demand is definitely growing. During the last quarter only 100,000 iPhones were sold at a price of 7,000 yuan, more than $1,000. Now sales have zoomed to an average of 10,000 a day.
Apple isn’t trying to compete for Lenovo’s 0.3 percent profit margin in the PC business. Apple wants to be the Louis Vuitton of computers in China. In fact the Oriental Morning Post reports that Apple will aim to match Louis Vuitton’s (LVMUY) China presence.
A MASSIVE MARKET OPENING
Apple in China aims to be much more than a boutique. Morgan Stanley’s Apple analyst, known for being bearish has become a bull on China.
Last January Katy Huberty told Fortune magazine that there are about 50 million potential Apple customers in China. Sales of iPhones could hit five million a year!
Apple’s growth momentum in China has raced past the U.S.
What about the high cost of smartphones? Lower income countries love them.
Morgan Stanley says there is strong interest and awareness of the Apple brand in China.
Long before the Apple store opened in Shanghai, Morgan Stanley’s bearish analyst predicted a rosy future. Her estimate: shares will trade at $325 to $425 by the New Year.
Try taking a hint from the Chinese.
The opening of the new Apple store in Shanghai over the weekend was spectacular. Thousands of Chinese Apple enthusiasts walked, drove, and flew in to attend the event at the foot of the Oriental Pearl Tower on Saturday.
The new store is a stunner. Under a forty-foot glass cylinder sprawl 16,000 square feet of sparkling retail space. With 175 employees, the Shanghai flagship store will have the largest “Genius Bar” assisting customers in the world.
The Shanghai opening matters because it signals that Apple is finally getting serious about the Chinese market. China is the second largest PC market in the world but so far Apple has barely made a dent.
The CEO of Lenovo (LNVGY) joked with Shanghai Daily, saying, “"We are lucky that Steve Jobs has such a bad temper and doesn't care about China. If Apple were to spend the same effort on the Chinese consumer as we do, we would be in trouble.”
Apple is the world’s largest technology company by market cap but that doesn’t mean it will ruin Lenovo’s business. That’s not the strategy.
APPLE GETS SERIOUS
The throngs attending the Shanghai store opening demonstrate something that Apple learned with its stores. New stores create buzz.
Selling Apple’s high-end products depends on clever marketing. This will be especially important in China where average salaries are lower than in most of the company’s established markets.
That’s why Apple intends to open 25 stores throughout the country by the end of 2011. That’s a major push even by Chinese standards.
Apple won’t say where the stores will be established but there are already rumors flying around Shanghai that a second store will open there in a popular high-end mall.
Doubters point out that Lenovo computers are sold through 10,000 retail outlets. By that standard the Apple invasion may seem tiny.
But Apple is targeting a surprisingly large contingent of upper middle class buyers. With Apple’s 23% profit margins, there’s a lot of money at stake.
Buzz is also critical to iPhone sales. China Unicom has sold only a million iPhones. But another two million have been bought on the grey market from tourists and smugglers.
Demand is definitely growing. During the last quarter only 100,000 iPhones were sold at a price of 7,000 yuan, more than $1,000. Now sales have zoomed to an average of 10,000 a day.
Apple isn’t trying to compete for Lenovo’s 0.3 percent profit margin in the PC business. Apple wants to be the Louis Vuitton of computers in China. In fact the Oriental Morning Post reports that Apple will aim to match Louis Vuitton’s (LVMUY) China presence.
A MASSIVE MARKET OPENING
Apple in China aims to be much more than a boutique. Morgan Stanley’s Apple analyst, known for being bearish has become a bull on China.
Last January Katy Huberty told Fortune magazine that there are about 50 million potential Apple customers in China. Sales of iPhones could hit five million a year!
Apple’s growth momentum in China has raced past the U.S.
What about the high cost of smartphones? Lower income countries love them.
Morgan Stanley says there is strong interest and awareness of the Apple brand in China.
Long before the Apple store opened in Shanghai, Morgan Stanley’s bearish analyst predicted a rosy future. Her estimate: shares will trade at $325 to $425 by the New Year.
Saturday, March 20, 2010
Open Letter to the President
Dear President Obama,
Facing the global financial crisis, record U.S. unemployment and two wars, I understand that you have a great many issues occupying your time. However I feel compelled to speak out about one of the key issues that needs greater attention from your administration: China.
You are understandably aware of your unique role in American history. I would respectfully submit that America, which regards itself as the world's lone superpower, is at a turning point equal to the events preceding the collapse of the Soviet Union. The economic rise of China, the world's most populous nation, is the global event of our times. Yet American policies towards China have not kept pace. Indeed, recent political events in Washington suggest that America is moving towards an antagonistic relationship with the Chinese at a time when we need Beijing's cooperation.
As you are no doubt aware, China has become the world's number one holder of U.S. currency and equity assets in an amount that may be approaching one trillion dollars. There are those who suggest that the United States embark upon a showdown with the Chinese in order to force Beijing to revalue the yuan to a level that some consider fair. Reckless voices in Congress advise that there is little risk in threatening the Chinese because they would stand to lose hundreds of billions of dollars if they began dumping dollar assets. This ill-considered assumption puts the nation's tenuous finances at risk, based on a an appalling lack of understanding of China's state of mind.
As one of the world's oldest civilizations, China is rightly proud. The paper money that your treasury prints was an inovation invented in China. The explosives that underlie America's military force originated in China thousands of years ago. After enduring a period that some Chinese call "the one hundred years of humiliayion" at the hands of foreign powers, the Chinese people are exquisitely sensitive about foreign intervention and justly proud of the economic success they have achieved in just three decades.
Because it is a robust military and nuclear power, an economic giant and a space-faring nation, China is impervious to threats from the United States. Yet the heavy hand of threats and intimidation are allowed free rein in Washington. This is a state of affairs that China can no longer acdcept.
Some have observed that you, Mr. President, have been treated with disrespect in meetings like the climate negotiations in Copenhagen. I would submit that the Chinese are giving back the same kind of treatment that they feel they have received.
To be sure, there are philisophical, political and economic concerns in China that America disagrees with profoundly. That is unlikely to change. Indeed, foreign pressure upon the Chinese to alter internal affairs to suit our preferences is likely to have the opposite effect, contrary to America's desires. Because China is a proud nation it will resent and resist even the best-intentioned foreign calls for change. Neglect or arrogant calls for adherence to American values will breed only resentment.
Despite its burgeoning economic and military strencth, China maintains that it is not a new superpower. Three to four hundred million people have risen to what we call middle-class status, a number roughly equal to the population of the United States. Yet twice that number of Chinese people remain mired in poverty. That is why China regards itself as an emerging nation. Beijing is determined to eliminate the poverty and pollution that go hand in hand with under-development. Beijing will not accept foreign dictates that run counter to this determination.
If America chooses to dictate policy to China, the result will be counter-productive. But if the United States chooses the path of cooperation and mutual respect with the Chinese, the results can be beneficial to both sides.
America, unlike Britain and Japan, does not have a history of crushing Chinese aspirations. In fact the U.S. and China cooperated in eliminating Japanese imperialism during World War Two. It is this kind of cooperation and mutual respect that must set the tone for future relations between Washington and Beijing.
The rise of China is the pivotal event of the 21st century. How America manages its relationship with China will set the tone for the next 100 years of history.
President Obama, domestic concerns are looming large, but America's relationship with China will be pivotal. The U.S. may choose the path of confrontation and embark on a path similar to the cold war. Or, the United States may set its priorities andemploy its diplomatic skills in a way that creates a new era among billions of people.
I urge you to place America's relations with China at the top of your priority list. The result will set the tone for the century.
Respectfully
George Wolff
Facing the global financial crisis, record U.S. unemployment and two wars, I understand that you have a great many issues occupying your time. However I feel compelled to speak out about one of the key issues that needs greater attention from your administration: China.
You are understandably aware of your unique role in American history. I would respectfully submit that America, which regards itself as the world's lone superpower, is at a turning point equal to the events preceding the collapse of the Soviet Union. The economic rise of China, the world's most populous nation, is the global event of our times. Yet American policies towards China have not kept pace. Indeed, recent political events in Washington suggest that America is moving towards an antagonistic relationship with the Chinese at a time when we need Beijing's cooperation.
As you are no doubt aware, China has become the world's number one holder of U.S. currency and equity assets in an amount that may be approaching one trillion dollars. There are those who suggest that the United States embark upon a showdown with the Chinese in order to force Beijing to revalue the yuan to a level that some consider fair. Reckless voices in Congress advise that there is little risk in threatening the Chinese because they would stand to lose hundreds of billions of dollars if they began dumping dollar assets. This ill-considered assumption puts the nation's tenuous finances at risk, based on a an appalling lack of understanding of China's state of mind.
As one of the world's oldest civilizations, China is rightly proud. The paper money that your treasury prints was an inovation invented in China. The explosives that underlie America's military force originated in China thousands of years ago. After enduring a period that some Chinese call "the one hundred years of humiliayion" at the hands of foreign powers, the Chinese people are exquisitely sensitive about foreign intervention and justly proud of the economic success they have achieved in just three decades.
Because it is a robust military and nuclear power, an economic giant and a space-faring nation, China is impervious to threats from the United States. Yet the heavy hand of threats and intimidation are allowed free rein in Washington. This is a state of affairs that China can no longer acdcept.
Some have observed that you, Mr. President, have been treated with disrespect in meetings like the climate negotiations in Copenhagen. I would submit that the Chinese are giving back the same kind of treatment that they feel they have received.
To be sure, there are philisophical, political and economic concerns in China that America disagrees with profoundly. That is unlikely to change. Indeed, foreign pressure upon the Chinese to alter internal affairs to suit our preferences is likely to have the opposite effect, contrary to America's desires. Because China is a proud nation it will resent and resist even the best-intentioned foreign calls for change. Neglect or arrogant calls for adherence to American values will breed only resentment.
Despite its burgeoning economic and military strencth, China maintains that it is not a new superpower. Three to four hundred million people have risen to what we call middle-class status, a number roughly equal to the population of the United States. Yet twice that number of Chinese people remain mired in poverty. That is why China regards itself as an emerging nation. Beijing is determined to eliminate the poverty and pollution that go hand in hand with under-development. Beijing will not accept foreign dictates that run counter to this determination.
If America chooses to dictate policy to China, the result will be counter-productive. But if the United States chooses the path of cooperation and mutual respect with the Chinese, the results can be beneficial to both sides.
America, unlike Britain and Japan, does not have a history of crushing Chinese aspirations. In fact the U.S. and China cooperated in eliminating Japanese imperialism during World War Two. It is this kind of cooperation and mutual respect that must set the tone for future relations between Washington and Beijing.
The rise of China is the pivotal event of the 21st century. How America manages its relationship with China will set the tone for the next 100 years of history.
President Obama, domestic concerns are looming large, but America's relationship with China will be pivotal. The U.S. may choose the path of confrontation and embark on a path similar to the cold war. Or, the United States may set its priorities andemploy its diplomatic skills in a way that creates a new era among billions of people.
I urge you to place America's relations with China at the top of your priority list. The result will set the tone for the century.
Respectfully
George Wolff
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