NetEase vs. Bidu: Which Chinese Tech Stock is a Better Buy?

NetEase, Inc. (NTES) provides online gaming, communication, and commerce services internationally. The company operates in three segments: Online Games Services; Youdao; and Innovative Businesses. On the other hand, Baidu, Inc. (BIDU) offers internet search services primarily in China. The company operates in two segments: Baidu Core; and iQIYI.

Several Chinese tech companies have faced strict regulatory supervision at home and in the United States. However, given the tech industry’s solid long-term growth prospects, many companies in this space are well-positioned to dodge the short-term issues the industry is facing with the growth of their international business. Also, the second-largest economy’s five-year plan is heavily focused on technological advancements, leading to higher investment in the sector. Therefore, both NTES and BIDU should benefit.

NTES has gained 5.1% over the past year versus BIDU’s negative returns. Also, NTES’ 17.9% gains over the past three months compare to BIDU’s negative returns.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On December 8, 2021, NTES announced that Morgan Stanley Capital International upgraded its MSCI ESG Rating to "A," surpassing 75% of the global media and entertainment companies. The company also received outstanding scores for its ESG initiatives in "privacy and data security" and "human capital development" among global peers.

Several law firms are investigating potential claims against BIDU on behalf of its stockholders. The investigation concerns whether the company has violated the federal securities laws and/or engaged in other unlawful business practices.

Recent Financial Results

NTES’ net revenues increased 18.9% year-over-year to $3.40 billion for the fiscal third quarter ended September 30, 2021. The company’s non-GAAP net income grew 5.1% year-over-year to $598.70 million. Also, its non-GAAP EPS came in at $0.18, up 5.9% year-over-year.

BIDU’s revenues increased 13% year-over-year to $4.95 billion for the fiscal third quarter ended September 30, 2021. However, its non-GAAP net income declined 27% year-over-year to $790 million. Also, its non-GAAP EPS came in at $2.28, down 28% year-over-year.

Past and Expected Financial Performance

NTES’ revenue and total assets grew at CAGRs of 12.5% and 22.7%, respectively, over the past three years. Analysts expect NTES’ revenue to increase 17.6% for the quarter ending March 31, 2022, and 16.6% in fiscal 2022. The company’s EPS is expected to grow 6.5% for the quarter ending March 31, 2022, and 18.4% in fiscal 2022.

On the other hand, BIDU’s revenue and total assets grew at CAGRs of 6.4% and 11.8%, respectively, over the past three years. The company’s revenue is expected to increase 8.5% for the quarter ending March 31, 2022, and 12.6% in fiscal 2022. Its EPS is expected to decline 0.9% for the quarter ending March 31, 2022, but grow 11.3% in fiscal 2022.

Profitability

BIDU’s trailing-12-month revenue is 1.47 times what NTES generates. However, NTES is more profitable with a gross profit margin and net income margin of 52.99% and 14.63% compared to BIDU’s 50.36% and 11.25%, respectively.

Furthermore, NTES’ ROE, ROA, and ROTC of 12.68%, 6.33%, and 7.86% are higher than BIDU’s 5.39%, 2.63%, and 3.15%, respectively.

Valuation

In terms of forward EV/S, NTES is currently trading at 4.15x, 100.5% higher than BIDU’s 2.07x. However, BIDU’s forward non-GAAP PEG ratio of 2.70x is 126.9% higher than NTES’ 1.19x.

POWR Ratings

NTES has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. On the other hand, BIDU has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

NTES has a B grade for Growth and Sentiment, consistent with analysts’ expectations that its EPS will increase in the upcoming year. On the other hand, BIDU has a D grade for Growth and a C grade for Sentiment, in sync with analysts’ expectations that its EPS will decline in the near term.

Moreover, NTES has a grade of B for Quality. This is justified given NTES' 14.36% trailing-12-month ROCE, which is 45.7% higher than the industry average of 9.85%. On the other hand, BIDU has a Quality grade of D, in sync with its 7.01% trailing-12-month ROCE, 28.9% lower than the industry average of 9.85%.

Of the 51 stocks in the China industry, NTES is ranked #1. In comparison, BIDU is ranked #36.

Beyond what I’ve stated above, we have also rated the stocks for Value, Stability, and Momentum. Click here to view all the NTES ratings. Also, get all the BIDU ratings here.

The Winner

The Chinese technology industry is expected to grow exponentially with increasing demand for advanced technologies this year and beyond. While both NTES and BIDU are expected to gain by dodging the short-term regulatory hurdles, it is better to bet on NTES now because of its robust financials, higher profitability, and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the China industry here. 

NTES shares were trading at $97.17 per share on Tuesday afternoon, down $3.47 (-3.45%). Year-to-date, NTES has declined -4.53%, versus a 0.56% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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