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Better Buy: Baidu vs. Alibaba

Joe Tenebruso, The Motley Fool

Alibaba (NYSE: BABA) and Baidu (NASDAQ: BIDU) are two of China's most powerful businesses. And as they've risen to dominance, they've rewarded their early investors with incredible returns.

But which of these stocks is likely to deliver bigger gains to shareholders in the coming years? Let's find out.

Two Chinese dragons facing each other

Image source: Getty Images.

Competitive position

Baidu leads China's internet search industry, with a roughly two-thirds share. Baidu's digital advertising business is highly profitable, so much so that it allows the search leader to invest aggressively in other high-growth areas such as streaming video, autonomous vehicles, and artificial intelligence.

Like Baidu, Alibaba commands the lion's share of its core market. It holds a 58% share of China's massive e-commerce industry, according to eMarketer. Alibaba also maintains powerful positions in areas such as cloud computing and mobile payments, as well as China's traditional retail industry, with its "New Retail" operations.

Additionally, Alibaba's digital advertising business has grown to become so formidable that it now represents a legitimate threat to Baidu. Intensifying competitive pressure from Chinese tech powerhouse Tencent Holdings represents another risk to several of Baidu's key businesses. These rivals have begun to eat away at Baidu's share of the search market: It's declined more than 15 percentage points from its highs back in 2017.

With its search dominance waning, Baidu's competitive position is no longer as strong as it was even just a few years ago. In contrast, Alibaba appears to be gaining share in multiple important growth markets. So Alibaba has the edge here.

Advantage: Alibaba.

Financial strength

Let's now review some key financial metrics to see how these two Chinese internet giants measure up:

Metric

Baidu

Alibaba

Revenue

$15.1 billion

$50.2 billion

Operating income

$2.5 billion

$8.9 billion

Net income

$4.0 billion

$10.1 billion

Operating cash flow

$5.2 billion

$21.3 billion

Free cash flow

$3.9 billion

$16.9 billion

Cash and investments

$32.0 billion

$62.3 billion

Debt

$9.4 billion

$19.8 billion

Data sources: S&P Global Market Intelligence; company filings.

Alibaba's sales, profit, and cash flow generation are all several times larger than that of Baidu. Alibaba also has nearly twice as much cash on its balance sheet, with $42.5 billion in net cash and investments compared to $22.6 billion for Baidu. Clearly, Alibaba is the more financially powerful business.

Advantage: Alibaba.

Growth

Alibaba is also growing much faster. Wall Street projects that Alibaba's profits will increase by nearly 25% annually, fueled by the growth of its e-commerce, New Retail, and international expansion initiatives.

Meanwhile, analysts estimate that Baidu's profits will rise by less than 8% annually during this same time, as the company continues to spend heavily in hopes of reaccelerating its slowing revenue growth.

Thus, Alibaba comes out ahead here, too.

Advantage: Alibaba.

Valuation

Lastly, let's take a look at some stock valuation ratios:

Ratio

Baidu

Alibaba

Price to sales

4.02

9.70

Price to free cash flow

15.58

28.82

Forward price to earnings

15.06

27.96

Data source: Yahoo! Finance.

Across all three metrics, Alibaba's stock is substantially more expensive than Baidu's. No doubt, Alibaba's higher expected growth rate plays a part in this. Still, Baidu's shares are 59%, 46%, and 46% cheaper based on sales, free cash flow, and expected earnings, respectively. That makes Baidu's stock the bigger bargain.

Advantage: Baidu.

The better buy is...

Baidu's stock may be more attractively priced. But Alibaba's stronger competitive position, superior financial strength, and greater growth prospects make it a better long-term investment.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu and Tencent Holdings. The Motley Fool has a disclosure policy.