It sure looks like the momentum build-up in internet stocks throughout 2023 has carried the stock market. Some bears believe this momentum is over, and it is all downside.
While there could be some truth to the theory behind the present downside, one clear name emerges as a winner in the group. Be aware of a significant shift in the financial markets:
The Chinese economy is still digesting several stimulus measures whose trickle-down effects will probably be notable after the Xi-Biden summit in San Francisco, pushing for de-escalating conflict and a more open trade relationship.
Allocating capital in Chinese markets
Understanding that the Technology Select Sector SPDR Fund (NYSEARCA: XLK) could be overextended relative to the S&P 500, as judged by its outperformance of over 31% on a year-to-date basis, which can make internet stocks in other areas more attractive.
In case you haven't noticed, legendary investor Ray Dalio has allocated capital in Chinese markets, namely within the iShares MSCI China ETF (NASDAQ: MCHI), so if he believes there is a rally coming in the nation, your best bet is not to fight him.
What better case can you use to compare the American representative Alphabet Inc. (NASDAQ: GOOGL) against China's prodigy Baidu Inc. (NASDAQ: BIDU)? By spreading these two against each other, you can make an educated call, seeing which situation fits your portfolio better.
Starting with price action, the market's language, you can benchmark each stock against its 52-week high prices to get a feel for current momentum. Regarding the internet industry, an average of 80.7% is where these names are today.
Alphabet stock is way out on top of the industry, at 97% of its 52-week high, so you can safely assume this is where the momentum is, but is this all good news?
Before you answer that one, check out Baidu's 68.6% of its 52-week high price, throwing this one into a deep bear market.
Beginning with analyst sentiment, Alphabet analysts are only shooting for a moderate 7.9% upside, while for Baidu, a consensus price target of $183.8 would imply a net 65.2% upside from today's prices.
Check it twice
Why would analysts be willing to stick their necks out on placing such a high upside on a Chinese internet stock right in the crosshairs of the intellectual property fight against the United States? One thing is for sure: this upside is justified.
While the industry should grow its earnings per share by an average rate of 26.1%, Alphabet analysts have projected a jump of 16% for the next 12 months, a bit disappointing compared to the benchmark. Still, markets are willing to overpay for these future earnings.
A P/E ratio of 24.1x will put Alphabet just above the industry's 23.9x average. Why would markets be willing to value this stock in line with the rest when its growth expectations fall below?
The other alternative is Baidu and the only excuse for not rewarding that business is that it's in the middle of geopolitical issues. Despite positive or negative feelings toward current conflicts, you cannot ignore cold, hard figures.
Baidu stock is valued roughly 56.2% below Alphabet, at a P/E ratio of 10.5x. Again, why else would markets discount this stock by that much when its EPS should grow at a pace 42% higher than Alphabet?
Fear.
As Warren Buffett likes to say, "Be greedy when others are fearful."
If you take any of his advice to heart, let it be this one, and let good greed take over your viewpoint toward Baidu, as it is the growth driver at a ridiculous discount.
