Why Google should quit China

If Google pulls out of China, the move will make Baidu all but a sure thing.

By InvestorPlace Jan 13, 2010 4:15PM

Louis NavellierGoogle (GOOG) threatened to end all operations in China. The reason? Techies at GOOG claim that the e-mail accounts of human rights activists had been broken into and while they didn't specifically point the finger at Beijing, the strongly worded statement made it clear Google blamed the government and is tired of all the Communist red tape in this booming nation.

 

Me, I would be thrilled to see GOOG end all operations in China -- but not for any morally superior reasons. It's for the very simple reason that if GOOG quits China, one company will step into the void and immediately grab market share and see profits skyrocket.

 

That company is search giant Baidu (BIDU). And if you need more proof of the potential, shares of BIDU jumped 10% in early trading today -- all thanks to Google's threats of leaving the People's Republic.

 

Here's the rundown on Baidu: The firm is the leading Chinese-language Internet search engine, with more than 70% of China's search market. Some people say this company is China's Google, but in fact this company is faring even better than that iconic company since Google's head in China recently resigned in 2009 after failing to challenge BIDU's stunning growth. Baidu earns nearly all of its revenue through online advertising services, but also operates a network of third-party websites and online communities.

 

The numbers prove BIDU is a powerhouse. In its latest quarter, Baidu's sales rose 36.7% to $160.7 million and its earnings rose 44.6% to $56.1 million or $1.61 per share compared with the same quarter a year ago. During the same period, the company's number of active online marketing customers rose 12.2%. China has the world's biggest population of Internet users, with 338 million people online, so the pool of potential customers is tremendous.

 

Though I am certainly not a fan of big government, either at the hands of communists in Beijing or socialist lawmakers in Washington, I've been an international investor long enough to realize that the you have to have an open mind when investing in emerging markets. Governments can be corrupt, infrastructure can be spotty and uncertainty is much higher. But the profits in these booming regions can be simply staggering for those brave enough to take the risks.

 

While I admire Google's moral stand against Chinese media controls, the bottom line is that the company will miss out on some big profits in the years to come if it makes good on its threat to leave. As an investor, I think with my checkbook -- and that makes GOOG a questionable buy.

 

On the other hand, if Google pulls out of China, the move will make Baidu all but a sure thing. And after a crazy two years on Wall Street, I would be thrilled to have such a stone-cold lock in my portfolio.

 

At the time of this writing, Louis Navellier owned shares of BIDU in personal or client portfolios.

 

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