Search Revenues Per Click (Google and LookSmart)

Working at a search engine company, it's interesting to see what other search companies are making on searches. So, just how much is a search or a click worth? Doing a little research, it's not hard to find out.

Looking at public financial information from LookSmart's shareholder earnings report, we see:

LookSmart earned $9.2 million in 3Q 2005 on 70 million paid clicks, which comes out to $0.13 per click. The company states that their revenue per clic was $0.15 per click excluding their Run On Site (ROS) product.

Google's revenue per search is reported on John Battelle's Search Blog. In Q3 2004, Google earned $0.09 per query (a different metric from LookSmart's revenue per click).

Searching for Growth in China

It's pretty tempting to invest in China's growth, and no other place to me seems more tempting than the growth of the Internet in China.

DISCLAIMER: I am not a financial professional, so do your own research. I own stock or options in Baidu and Sina as of this writing, and plan to buy more in the future, but may also to sell them in the future at an unspecified time. Investing in emerging markets is especially risky and you should do so with extreme caution.

As of July 2005, internet users in China totalled over 100 million people [see reference], nearly as large as the U.S. internet population. In addition, as of today, the #5 (baidu.com) and #6 (sina.com) most visited web sites in the world are from China [See Alexa Global Top 500]. Even with so many Chinese people already online, there's still plenty of room for growth given China's staggering 1.3 billion population. Due to the low incomes in China, it will take years or decades for a significant fraction of the Chinese population to get online, but then, that's also years to decades of growth ahead. For those with nerves of steel and a long time horizon of several years, it's a attractive, though risky place to invest.

The Case for China
Many economists and politicians think Chinese currency is undervalued. The exact amount is up for debate, but this paper pegs it as about 22.5% undervalued. This would work in favor of those owning assets in Chinese companies and in favor of owning companies profiting in Chinese currencies.

The Case for Sina.com
Sina.com is one of the largest web portals in China and also provides mobile phone data services, web hosting, and more. I view it like a "Yahoo of China", they do a little bit of everything. As of today, it actually has a reasonable forward P/E of 23.16 (current quote: SINA). It's profitable and should benefit from the overall growth of internet use in China.

The Case for Baidu.com
Baidu had a spectacular IPO earlier this year. Its offering was at $27 a share, but on the opening day it closed at $123.90 a share. You'd be hard-pressed to find someone that would say it's undervalued with a forward P/E today (November 13, 2005) of 166.79! In addition, some analysts think its current fair market price should be around $45/share (see Baidu Shares Appear 'Extremely Overvalued'). I think that it's certainly true, it's overvalued by any normal measure. But what if you look into the future, say 5 years from now. According to this article research firm Piper Jaffrey thinks the China search market will grow from $134 million today to $1 billion by 2010. Currently Baidu has a 44.7% market share, but if that erodes due to competition by 2010 to around 30%, that means Baidu would be pulling in $300 million in revenues. Expenses at search companies tend to be low, around 30% of revenues, so earnings might be around $210 million. That puts my Baidu at a valuation of between $4.2 billion and $6.3 billion (assuming a P/E of between 20 and 30), compared to its current market value of $1.68 billion when the China search market reaches $1 billion. Whether it will happen in 5 years or not is a big question, and whether the competition will acquire, or kill Baidu is another big question, since 5 years is a long time in Internet time. Interestingly enough, Google also has a minority investment in Baidu.


Also of interest:

Speech by Baidu's Cofounder Robin Li

Web traffic at Baidu today is about 1/3 of Google's U.S. traffic, according to Alexa.com. See the current traffic numbers here.

How Do Search Engines Handle Chinese Queries - A comparison of Chinese search engines.

Buying Emerging Markets

I've been noticing over the past few years (as many others also have noticed) that China, India, and other emerging markets have been growing quickly. Anyways, recently I have finally decided to take action and expand my investments to these emerging markets.

DISCLAIMER: I am not a financial professional, so do your own research. I own the investments mentioned in this article as of this writing, and plan to buy more in the future, but may also to sell them in the future at an unspecified time. Investing in emerging markets is especially risky and you should do so with extreme caution.

There are two basic approaches I see to benefitting from emerging markets. First, invest in companies that are in those emerging markets, and second, invest in companies that would be affected by emerging markets (in particular, emerging markets will have a large effect on raw materials and commodities as they grow industrially and build infrastructure). The podcast China: Stalking the World's Commodities discusses the long term trend in the growth of commodity prices and usage due to increasing demand from emerging markets such as China. It's worth listening to.

The best way to get exposure into a market is through an index fund. For investing in companies in emerging markets, I chose the BLDRS Emerging Markets Fund(ADRE) which is an index of 50 stocks in diversified emerging markets. It has a low expense ratio (0.3%) and is an ETF so can be traded just like a stock. At the time of this writing, the fund's top country holdings included Brazil (24.7%), Korea (15.4%), China (13.0%), Mexico (12.4%), Taiwan (10.7%), and India (7.0%). See the ADRE fact sheet for more information.

As for commodities, it's a bit harder for individuals to directly invest in commodities themselves (such as oil, natural gas, etc.), so I chose a mutual fund that invests in companies that own or are involved in the development or processing of natural resources, the T. Rowe Price New Era Fund (PRNEX). Although not exactly investing in commodities, this fund should benefit from rising demand for commodities.