Baidu on the way to a monopoly

This morning news hit the wires that Google may almost certainly leave China and shut down its Chinese search engine. The direct beneficiary of such a move would be Baidu. Google’s share price fell and Baidu jumped.

A few weeks ago I read some analyst saying that the possibility for Google leaving China is about 30%. Today you can read it is 99.9% and of course it is clear for everyone that big G would have not retracted its threat (or promise). As usual, after the news is out, people fool themselves and others and pretend that they had known everything beforehand.

But trading is a game with possibilities and nothing is for certain. That is why stocks fluctuate and it demonstrates that relative to the ubiquitous self confidence almost nobody knows anything.

I also remember an analyst saying that Baidu’s stock is worth $500 with Google staying and $600 with Google leaving China. He even deduced from these fictitious numbers that the chance for Google pulling out of China is 50%, because Baidu’s stock was priced at $550 then.

Interesting – given that Google trashed all its competitors elsewhere, and that after coming very late to the party, one should think that BIDU would have been headed not to $500 but more towards the penny stock zone in the adverse case. Now Baidu has the chance to capture the bulk of Google’s 35% market share of China’s search volume, adding to its own 60%.

Here is another perspective: Baidu’s stock swung down 75% and then advanced about 400% during the last 20 month, just to tunnel through the financial crisis. A price difference of only 20% for getting the big competitor out of the way?

Anyway, after prospects are materializing, this is a good day for Baidu. Its monthly chart shows that it has a stronger growth rate but less stable earnings than Google. The stock has seen a huge up-move last year. It is expensive, but the growth outlook of the company is good, as it now has much less to fear the tech giant grinding it to the bones, slowly but steadily.

What are the prospects for Google’s stock? They have not much changed today. Google makes only a tiny fraction of its revenue in China. If management thinks it should go ahead with its bold move, it is likely good for Google’s business in the long run. However, the stock market sees that differently, at least for now.