2023-06-29 09:17:23 ET
Summary
- Baidu is China's AI leader. However, it has yet to benefit from the AI hype that lifted AI-exposed stocks in the US since the start of 2023.
- Investors are likely still pricing in a steep discount against China's geopolitical headwinds. However, its AI leadership could see it gain more share against its rivals.
- While BIDU has outperformed its leading peers since October 2022, it's still cheap. Also, I gleaned that BIDU has reversed from its downtrend bias, improving buying sentiment.
- Investors should consider taking part in Baidu's AI story before the AI hype train subsequently catches up.
Baidu, Inc. (BIDU) has been a beneficiary of two critical drivers: the reopening of the Chinese economy and the generative AI trends. As such, BIDU has outperformed Tencent (TCEHY) and Alibaba (BABA) since October 2022, as China's leading AI company is keen to expand its leadership to gain share.
Baidu's robust Q1'23 earnings release demonstrated the recovery of its search engine business, as it benefited from the recovery of several offline verticals as China reopened. Keen investors should recall CEO Robin Li's optimism as Baidu leveraged the recovery in " travel, healthcare , bin services, and local services." As such, it helped Baidu register an 8% YoY increase in revenue for Baidu Core.
Notably, Baidu's leadership in the generative AI space could help it to deliver share gains against its rivals, as the company is optimistic about the competitive edge in its AI architecture.
Management reminded investors that its AI lead is hard to replicate, given the company's early investments in AI and the vast amount of data that Baidu search engines have amassed over time. Investors who have followed Baidu for some time would likely concur that Baidu is a recognized leader in China's AI space.
Baidu highlighted that its comprehensive AI architecture delivers the critical pillars to maintain its edge against its rivals. Li articulated that Baidu's architecture is predicated on its "cloud infrastructure, the PaddlePaddle deep-learning framework, large language models, and AI applications." Notably, PaddlePaddle is instrumental to the improvement in "AI capabilities and creates synergy with ERNIE Bot."
As such, Baidu's AI capabilities seem ready for showtime. I updated an article early last year that investors could have been too aggressive in focusing on the company's AI initiatives to justify buying shares in BIDU aggressively.
However, the company's progress and efforts have demonstrated to me why Li and his team recognized the potential for AI leadership early and rightly so. As such, it has continued to scale its autonomous driving efforts, recently gaining new licenses in Shenzhen , its fourth city for fully driverless robotaxi deployment. While its profitability remains a work in progress, management is confident about achieving breakeven over time, as it focuses on improving efficiencies while scaling further. Management also highlighted that "hardware costs are expected to decrease with the release of new models and advancements in robotics." As such, the company is playing the long game in the robotaxi business.
With the public beta testing of Baidu's generative AI tools, I believe the company's AI leadership could see accretion that has likely not been captured in the current analysts' estimates. The company has also not provided opportunities for investors to over-hype the possibilities, allowing the developments to progress more sustainably. Despite that, management telegraphed its ambitions and expectations about the possibilities with its generative AI efforts.
Li reminded investors that the company is actively "integrating ERNIE Bot into all of its businesses." As such, it has confidence that it could lead to the company gaining "market share and [achieving] sustainable long-term growth."
Therefore, I believe Baidu's AI efforts are coming to fruition, as Morgan Stanley (MS) analysts believe that Baidu's cloud revenue could receive a significant boost through 2025. The analysts also expect Baidu's AI tools to help it gain ad market share, with accretion leading to a " 17% CAGR from 2022 to 2025" for Baidu Core's revenue.
Interestingly, while the market has spotted the opportunity in BIDU as an AI play, it's still valued attractively, as investors likely continue to place a discount on geopolitical headwinds.
BIDU has pulled back markedly from its March 2023 highs. However, its momentum has improved, as it formed a bottom in May. It also helped BIDU to overcome sellers determined to bring it down further, as BIDU recovered remarkably.
As a result, BIDU has retaken its bullish bias and likely formed its long-term bottom in October 2022. I assessed that BIDU must still break above its March highs, a critical resistance zone that could see sellers returning.
However, with BIDU's bullish bias reversing from bearish to bullish, I have a stronger conviction that the stock should be able to break through that level subsequently, given BIDU's relatively attractive valuation with a forward EBITDA multiple of just 8.1x, or a forward free cash flow yield of 8.4%. The AI hype has likely not caught up with BIDU yet, and investors should capitalize while they can.
Rating: Maintain Buy.
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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Baidu: Buy Before The AI Hype Catches Up