Google Still Better Bargain Than Baidu

Tickers in this article: BIDU GOOG QIHU YHOO

NEW YORK ( TheStreet) -- Baidu extended its 12-month decline to 36% on Friday, raising questions as to whether the Chinese Internet search leader could become a magnet for value investors.

"It's certainly come down a lot from a high of $135 just a few months ago," said Brian Frank, portfolio manager at New York-based Frank Capital which oversees about $50 million in assets and specializes in value-stock investing using the Enterprise Value relative to EBITDA metric.

Baidu lost 7.9% on Friday to close at $85.02.

Frank said that based on this metric, Baidu was trading at 13.7x enterprise value to EBITDA in the last 12 months. By comparison, Google , which Frank Capital owns, was trading at 13.4x.

" I would probably demand a discount if I was going to buy Baidu, I would demand a discount to Google ," he said. "Google is just much more globally diversified and I really like their advantages in smartphones, with the Android operating system. So the fact that Google is kind of embedded in the Android operating system is a tremendous advantage in trading at a premium to Baidu."

"Baidu is getting there, with a couple of more days like this then I'll definitely be looking at it, but I don't think it's quite there yet," Frank added.

Google fell 1% on Friday to $801.42. The world's largest search engine has gained 30% in the past 12 months.

Echo He, an analyst at Maxim Group in New York has a "sell" rating and $75 price target on Baidu on expectations that margins will have to keep on sliding, along with the existing pressures on revenue, as the company pours resources into defending its traditional PC-based source of revenue and accelerating its market share in the increasingly dominant mobile-internet space.

"Even if it falls lower, I wouldn't recommend buying the stock if the margin declines have not stopped," said the analyst. "Low price and low valuation is not sufficient to buy a stock. Low valuation plus margins staying flat or starting to improve vs. continuing to decline is a point where value investors may own."

Baidu's PC-based revenue growth continues to lose steam due to a slowing economy and growing competition on mobile and PC, compounded by the growing popularity of mobile that's cannibalizing PC search queries.

On the PC search-side, aggressive new rival Qihoohas become a formidable rival, and on the mobile side, a handful of private companies including Tencent have emerged as genuine threats.

Management reiterated during the company's first-quarter call Thursday its commitment to investments in mobile R&D and marketing, cloud services and acquiring smaller companies as it strives to seek new avenues of growth in online and mobile search and online videos. They must also defend their current market share by putting more money into sales and marketing promotions.