2023-08-29 11:13:36 ET
Summary
- Baidu, Inc. is experiencing accelerating growth, with 15% growth rates in the June quarter despite previous struggles due to Covid and Chinese restrictions.
- The company's use of generative AI in online marketing has led to revenue growth and improved user engagement.
- Baidu's robotaxi business has the potential for significant growth, with the company about to surpass the 1 million quarterly ride threshold.
- The stock only trades at 12x very conservative EPS targets.
After a few difficult years due to Covid lockdowns and Chinese restrictions, Baidu, Inc. (BIDU) is finally waking back up. The Chinese search giant has several major catalysts for growth, led by generative AI. My investment thesis remains ultra Bullish on the stock trading below $150 with the potential for a major breakout.
Accelerating Growth
Heading in the Q2 '23 results , the Chinese economy was struggling. Baidu wasn't forecast to produce much in the way of growth, yet the company hit 15% growth rates in the June quarter.
Baidu has struggled to grow off and on over the last few years due to Covid policies and other restrictions. The Chinese economy is struggling to rebound, but Baidu has promising developments in AI and robotaxis to drive growth far beyond the growth rates of the economy.
Similar to Alphabet/ Google ( GOOG , GOOGL ) in the rest of the world, AI chat has only appeared to enhance prior search results. The original thought that generative AI was going to destroy prior search businesses is only going to benefit Baidu in China and Google in most other countries.
Baidu suggests online marketing revenue grew in Q2 grew due in large part to using AI to enhance the auction system in order to obtain a better match with ads to search queries. In addition, Baidu is seeing incremental user queries and a higher click-through rate and user retention.
Online marketing revenues grew 15% YoY, along with the rest of the business, is a very positive sign. On the Q2'23 earnings call , CEO Robin Li made these comments about the improving trends:
I mentioned earlier that we have made some major improvement in advertising technology by using LLM and Generative AI. Along for more innovative and personalized ads, I believe there are lots of room for growth in this aspect, and I look forward to further breakthroughs. Such improvement in monetization technology have started to contribute to revenue and ECPM growth starting from this quarter in Q3.
The impressive part of the story is that the revenue growth was almost entirely due to AI. Apollo Go got limited discussion for a business that grew rides 149% YoY. Baidu is now up to 714K rides per quarter with Shenzan and Shanghai only now opening up.
The robotaxi business is on a path to passing the threshold of 1 million quarterly rides and has the potential for a multi-billion dollar quarterly opportunity. The prior analysis calculated an opportunity of up to $4.7 billion per quarterly revenues in 2030.
Minimal Expectations
Baidu wasn't very clear on revenue trends following the strong Q2. The company did suggest online marketing and cloud businesses would benefit from generative AI leading to faster growth ahead.
The current analyst revenue targets suggest the Chinese search giant struggles to grow, much less repeats the 15% growth in Q2. The consensus estimates have Baidu growing at a sub-5% range for the next couple of quarters.
The potential here is for considerable upside due to multiple expansion on top of growth. Baidu only trades at 12x EPS estimates and the company continues to produce massive EPS beats after hitting $3.11 in Q2 for a $0.78 beat.
The analyst targets appear far too conservative for the quarters ahead. Analysts don't even forecast Baidu topping a $3+ EPS in the quarters ahead despite the December typically producing higher profits from the online marketing market.
Takeaway
The key investor takeaway is that Baidu has massive opportunities to finally return to strong growth. The Chinese search giant has several major catalysts in generative AI and robotaxis the stock market appears to be ignoring.
Investors should continue using the weakness from a market focused on weak Chinese economic data while ignoring the strong results from Baidu.
For further details see:
Baidu: Waking Back Up