2024-01-16 15:50:43 ET
Summary
- Baidu, Inc.'s AI product, ERNIE, was mistakenly linked to the Chinese military, causing a drop in stock price.
- The Chinese company has reassured investors that their AI platform is open to the public, including Chinese military research labs.
- The stock is incredibly cheap, with cheap valuations and large cash and investment positions, especially considering the leading AI platform position.
No matter what Baidu, Inc. ( BIDU ) has accomplished in the last few years, the stock continues to lag the market. The Chinese company has now seen their AI product linked to the military, sending investors into irrational panic again. My investment thesis remains ultra Bullish on the technology leader.
Awkward AI Position
Last week, Baidu slumped on reports the company was affiliated with the Chinese military . The Chinese company has a leading AI platform called ERNIE, and the South China Morning Post reported the platform was affiliated to a research lab of the Chinese military.
The company went to great lengths to assure the U.S. and interested parties that their LLM was open to the general public, including Chinese military research labs. The South China Morning Post has apparently corrected their original media report to make this note.
Baidu fell over $8 on Friday following the media report and is down another 4% to below $105 to start this week. Citi Research seems to agree the market overreacted to a scenario where the Chinese military is apparently just using a public LLM from Baidu.
The Chinese tech giant has made AI and robotaxis the prime push of future growth. Any negative connection to the Chinese government would clearly hurt the ability of Baidu to gain investor support.
At the end of December, the company announced surpassing 100 million users on the AI chat tool. The SuperCLUE ranking has the ERNIE bot ranked as the highest rated generative-AI chatbot built by a Chinese company and isn't far behind the latest ChatGPT bots from OpenAI.
Baidu started charging $8 per month in November for the newest version of the ERNIE chatbot. ChatGPT charges $20 for their subscribers.
Even a secondary generative AI tool in the U.S. is looking at reaching revenues of $1 billion this year . Anthropic originally only had forecasts for sales hitting $500 million in 2024 after topping $100 million in annualized revenues towards the end of 2023. The estimates have now reached 10x the revenue target from late October.
Not Without Risks
The biggest risk to the Baidu story is U.S. restrictions on new AI GPU chips from Nvidia ( NVDA ). On the Q3'23 earnings call , CEO Robin LI made the following statement regarding the chip supply issue (emphasis added):
...we have a substantial reserve of AI chips , which can help us keep improving ERNIE Bot for the next year or 2 years . Also inference requires less powerful chips, and we believe our chip reserves as well as other alternatives will be sufficient to support a lot of AI native apps for the end users. And in the long run, having difficulties in acquiring the most advanced chips inevitably impacts the pace of AI divestment in China. So, we are proactively seeking alternatives. While these options are not as advanced as the best chips in the U.S., our unique four-layer AI architecture and strength in AI algorithm will continue to help us improve efficiency and mitigate some of these challenges.
Clearly, Baidu got a jump start on loading up on AI chips from Nvidia providing the company with a stockpile for up to 2 years. The company will automatically have an advantage over other Chinese companies unable to acquire new AI chips under the updated U.S. restrictions.
Though, some signs exist Chinese companies and the military are still acquiring new AI GPU chips despite the ongoing U.S. ban. Considering the chip position of Baidu and the overall leadership of the technology company with their LLM, the major risk is likely any connections with the Chinese military.
This risk appears low, though the market immediately panicked on the original news. The stock has now slumped to below 2x sales with a P/E multiple of only 10x. Baidu trades as if the company has no growth initiatives.
Besides AI, the Chinese tech. company is leading the market in ridesharing completing 821K rides during Q3, up 73% YoY. Baidu doesn't release robotaxi revenues, but the focus on the AI division is shifting some resources from the ridesharing business.
Baidu definitely has market risks due to the company operating in China. Outside of this risk, the company has a massive cash balance of $27 billion likely contributing to the ability to quickly load up on AI chips before restrictions. The company produced over $700 million in free cash flow in Q3'23 alone and the net cash balance of $17 billion in nearly half the stock market cap of below $40 billion. Not to mention, Baidu has another $10 billion in long-term investments leading to a net cash and investment total of over $27 billion.
Takeaway
The key investor takeaway is that no signs exist of Baidu actually working directly with the Chinese military on AI tools. The stock was irrationally hit again, providing an opportunity for investors to own a leading AI company with both a promising generative AI tool along with a robotaxi service not far above the cash and investment assets of the business.
For further details see:
Baidu: Chinese Risk Is Overdone