2023-05-29 11:57:16 ET
Summary
- Baidu posted strong Q1 2023 results, beating analyst consensus estimates with regard to both top line earnings.
- For Q1 2023, revenue was up about 10% YoY and earnings jumped by close to 48% YoY respectively.
- Business momentum is expected to continue in Q2 as the group's advertising and cloud business are likely to capture further upside.
- Despite improving business fundamentals and encouraging AI initiatives, BIDU stock remains priced quite cheaply.
- I see Baidu as undervalued and estimate a fair implied share price equal to $188.94.
Baidu (BIDU) posted solid Q1 2023 results, beating analyst consensus estimates with regard to both topline and earnings. The better-than-expected results were driven by a noteworthy recovery across the tech giant's ads and cloud business, a tailwind that will likely continue to support Baidu well into the 2H of 2023, as the post COVID recovery is expected to gain steam. Moreover, Baidu is contemplating ways to leverage the company's LLM/ AI technology (ERNIE Bot) for multiple products, including, Search, Cloud, Wenku, and Maps.
Despite the improving business fundamentals and encouraging AI initiatives, BIDU stock remains priced quite cheaply. The stock is currently valued at 11x FY23 EV/EBIT, a multiple which fails to reflect the company's strong competitive moat and growth outlook. Post-Q1 2023, I update my valuation model for BIDU, and I now calculate a fair implied share price equal to $188.94.
Recovery Across Ads & Cloud Drive Q1 Earnings Beat
Baidu delivered a strong Q1 2023 earnings report , surpassing market expectations on both topline and earnings. During the period from January to end of March, the Chinese internet giant generated $4.54 billion of revenues, up 10% YoY, and topping estimates by approximately $130 million. Baidu's Core business grew by 8% YoY, to ~$3.3 billion. Notably, online marketing revenue grew by ~7% YoY, to $2.35 billion, after eight consecutive quarters of decline, driven by the demand recovery tailwind in healthcare, travel and business services.
With regard to profitability, Baidu's gross margin improved by about 600 basis points YoY, to 51.4%; non-GAAP net profit jumped 48% YoY, to $848 million ($2.31/ share), toping consensus estimates by about 16% ($0.47/share).
Other Q1 2023 highlights include:
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Baidu's autonomous ride-hailing service, Apollo Go, grew 236% YoY and 18% QoQ, providing approximately 660,000 rides. In addition, on March 17th, Apollo Go obtained Beijing's first permits to operate ride-hailing services without a driver or safety operator in the vehicles
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Baidu has introduced the ERNIE Bot, a tech equivalent to the US' ChatGPT, which the company plans to steadily incorporate into all of its business
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Baidu's Xiaodu once again secured the top position in China for smart display shipments and smart speaker shipments in 2022, as reported by IDC and Canalys
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Baidu's application ecosystem grew 4% YoY, to a monthly active users (MAUs) of 657 million
- The iQIYI platform expanded to 129 million users, compared to 101 million for the same period one year prior (28% YoY growth)
Strong Outlook For Q2 and Beyond
I expect Baidu's strong business momentum to continue in Q2 and into the second half of the year, likely resulting in an 8-10% YoY topline growth for the company's advertising business and a 20-25% YoY topline growth for company's cloud business.
When Alex Yao from JPMorgan (JPM) asked about the advertising momentum, Baidu CEO Robin Li answered that the recovery is still providing a tailwind:
Now, we are in a positive territory, and the momentum got further strengthened in the current quarter - in Q2.
Referencing the cloud business, investors should consider that in Q1 the segment has achieved positive non-GAAP operating profitability for the first time ever, as cost optimization supported stronger margins. Now, as IT budget spending recovers, especially by state-owned enterprises and government clients, Baidu's cloud business is poised to further strengthen margins on supportive topline momentum, ultimately leading to attractive earnings upside on a group level.
In addition, Baidu's cloud business may see further upside on enterprise customer's demand for the ERNIE bot, touching diverse sectors such as finance, software, education, and online travel. After introducing Ernie Bot in March, Baidu is reportedly pushing internal tests to integrate its LLM/AI capabilities into various cloud products (and also Search, Wenku, and Maps, etc). With that frame of reference, the company has observed a high level of demand for both advertising consumer and enterprise-oriented services. Now, while the specific timeline for the public launch of these generative AI products is uncertain due to the requirement of government approval, the upside for the ERNIE bot technology should be quite significant, once it is rolled out on a larger scale.
On the backdrop of such positive momentum, analysts are right to revise EPS expectations for FY23 upwards. For the current fiscal year, consensus now estimates that Baidu will accumulate about $10.3 EPS, up from $9 EPS estimated approximately 6 months ago.
Valuation - $188.94/Share TP
Reflecting on a strong earnings report, paired with an improving ad and cloud business, as well as OPEX discipline and strategic investments in AI, I update my EPS expectations for BIDU through 2025: For 2023, I now estimate EPS in between $10.1 and $10.4. For 2024 and 2025, I anchor my EPS estimates on $12.3 and $13.15 respectively.
I continue to anchor on a 3.25% terminal growth rate (approximately one percentage point higher than estimated nominal global GDP growth). However, I raise my cost of equity by 100 basis points, to 11%, which reflects geopolitical tensions and higher risk-premia across asset classes on the backdrop of higher interest rates.
Given the EPS updates as highlighted below, I now calculate a fair implied share price for BIDU equal to $188.94/ share, estimating approximately 50% upside.
Below also the updated sensitivity table
Conclusion
Baidu posted strong Q1 2023 results, beating analyst consensus estimates with regard to both topline earnings. For Q1 2023, revenue was up about 10% YoY and earnings jumped by close to 48% YoY respectively -- and the positive business momentum is expected to continue in Q2 and into the second half of the year as the group's advertising and cloud business are likely to capture further upside in China's economic recovery post COVID. Moreover, early feedback on ERNIE bot's potential is encouraging, and markets arguably fail to misprice the technology's potential for driving Baidu's fundamentals through 2025 (and likely beyond).
Despite improving business fundamentals and encouraging AI initiatives, BIDU stock remains priced quite cheaply. I see Baidu as undervalued and estimate a fair implied share price equal to $188.94.
For further details see:
Baidu: Poised For A Share Price Appreciation