Summary
- Baidu continues excelling in AI technologies, and the company's "Earnie Bot" provides significant revenue growth and profitability potential.
- Baidu also has the top search platform in China and has a booming cloud business.
- Furthermore, the company's robotaxi fleet keeps expanding.
- Baidu's earnings are coming up, and the company should not disappoint.
- With a $50 billion valuation, Baidu's stock can appreciate severalfold in the next few years and could be one of the best Chinese stocks to own for the next decade.
Despite owning about 85% of China's mobile search market, Baidu (BIDU) is much more than the country's top search engine. Baidu remains on the cutting-edge of AI, and its stock price surged as it revealed its ChatGPT-style AI bot recently. Baidu is also a leader in the driverless taxi industry with enormous potential. Additionally, Baidu has one of China's leading cloud services and controls a majority stake in iQIYI ( IQ ). Indeed, a technology conglomerate of this magnitude should be worth hundreds of billions of dollars. Baidu's market cap is only about $50 billion, and the stock is cheap. Therefore, as Baidu continues growing and expanding profitability, its stock price should increase significantly in the coming years.
Baidu - A Technical Breakdown
Since my recent buy recommendation , Baidu's stock has skyrocketed by approximately 70%. However, the stock doubled from its bottom in October to its recent high. Now that the stock has appreciated considerably quickly, where will it go from here?
We are at a crucial consolidation level, and Baidu may trade sideways in the $120-150 range before breaking out to make more highs. We have a constructive reverse head and shoulders pattern from the bottom in October. Also, can you believe that Baidu's market cap tanked to only around $25 billion at one point? It isn't easy to fathom, but I used this time frame to double down on my Baidu position. The critical support/breakdown range is $120-100, and the crucial resistance/breakout level is $150-160.
Why is Baidu Worth Only $50 Billion?
The Short Answer: Baidu's market cap is depressed because the company is Chinese. However, Baidu is one of China's finest tech companies with enormous long-term potential in AI, search, cloud, various apps, driverless cars, entertainment, and more. During the panic and the heavy selling throughout 2022, there were legitimate concerns that Chinese companies, including Baidu, could be delisted due to auditing issues. This phenomenon has led to crashing prices for many top Chinese stocks, including Baidu. However, the delisting has been averted now that the U.S. can access the "historic" audit data. Despite removing the main risk from the equation, Baidu's stock remains cheap. Also, before we review the company's very low valuation, let's look at what businesses Baidu is involved in.
Number One in China's Search
China Search Engine Market Share Data (mobile)
China search (mobile) (gs.statcounter.com)
While Baidu's search share took a minor dip this year, the company remains on top with about an 85% share of the ultra-lucrative Chinese mobile search market. Moreover, we've seen temporary declines in Baidu's market share in previous years, yet the company remains China's top search engine year after year.
China Search Engine Market Share Data (all platforms)
China search (all platforms) (gs.statcounter.com )
While Baidu has seen increased competition in the "all platforms" search, the company still has a formidable 65% market share. Moreover, this may be a transitory decline for Baidu, and the company will likely continue maintaining significant percentages of the search engine market in China. Baidu delivered about $4.57 billion in revenues last quarter, and about $2.8 billion of the sales came from online marketing services or ad revenues.
China Cloud - A Growing Business for Baidu
Baidu has the fourth-largest cloud business in China, with room for growth. While Baidu is going through a transitory slowdown, the company's cloud business continues to outperform , enabling the company to beat recent estimates. Baidu's cloud business should continue growing, leading to higher revenues and increasing profitability for Baidu as we advance.
Baidu's Driverless Taxi Fleet is Expanding
Baidu is a leader in driverless technologies and plans to expand its driverless robotaxi fleet by 200 vehicles in 2023 . Baidu's driverless fleet now covers an area of over 100 square kilometers across China. Moreover, as Baidu's driverless technology progresses, the company should continue increasing revenues and improving profitability in this business segment.
Baidu's Earnie Project - The Future is Now
In an earlier report, Baidu confirmed that it would complete internal testing and launch its ChatGPT-like bot in March. The developments indicate that Baidu remains a global leader in AI technology. Furthermore, a successful launch of the company's ChatGPT-like bot will enable the company to create a new revenue stream that should turn into a solid revenue-generating pipeline in the coming years. Also, let's consider the big picture. AI is the future, and top companies like Alphabet ( GOOG ) ( GOOGL ) and Microsoft ( MSFT ) compete with Baidu, having similar ambitions with their versions of Earnie (ChatGPT) and other advanced AI technologies. The AI leaders of today should be some of the most profitable technology companies of tomorrow.
Baidu's Valuation In One Word - "Silly"
Despite the company's dominant market-leading position in China's search market and numerous secondary businesses with significant growth and profitability potential, Baidu still trades at a dirt-cheap valuation. Also, with its earnings coming up, Baidu is significantly adept at beating analysts' estimates.
Despite the transitory slowdown globally, Baidu beat its consensus EPS estimates by a substantial margin over the last four quarters. While consensus estimates were only $6.06, Baidu earned $8.15 in its previous four quarters. This dynamic represents a staggering 34% beat rate over the consensus figures. If you believe that outperforming estimates is a relatively new phenomenon for Baidu, it's not. Baidu has beaten consensus EPS estimates in 19 out of 20 quarters. Moreover, we see a similar dynamic with revenues, outperforming in all but one of the last 20 quarters. Therefore, analysts have been asleep at the wheel regarding Baidu, and the company's trend of beating analysts' figures should continue.
EPS Estimates - Very Low For Baidu
Consensus 2022 EPS estimate is $8.38. Based on previous outperformance, Baidu will probably surpass consensus figures and could report around $9 for 2022. Also, while the consensus 2023 EPS estimate is $9.38, the company can do much better. In its last four quarters, Baidu has outperformed consensus figures by 34%. Therefore, if we apply a modest 15% beat rate to 2023's figures, we arrive at an EPS of roughly $10.80. Moreover, 2024's consensus EPS figure is $10.90, and applying a 15% beat rate to this estimate provides an EPS estimate of $12.54 for next year. Therefore, with the stock trading around $140, Baidu is likely trading at 11 times forward earnings, remarkably cheap for a company in Baidu's position.
Here is what Baidu's financials could look like in future years:
Year | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 |
Revenue bs | $20 | $23 | $26 | $30 | $34 | $38 | $43 | $48 |
Revenue growth | 10% | 15% | 14% | 14% | 13% | 13% | 12% | 12% |
EPS | $10.5 | $12.5 | $15 | $18 | $22 | $26 | $31 | $37 |
EPS growth | 12% | 19% | 20% | 20% | 22% | 18% | 19% | 19% |
Forward P/E | 11 | 15 | 18 | 20 | 19 | 18 | 18 | 17 |
Stock price | $140 | $225 | $324 | $440 | $494 | $558 | $666 | $720 |
Source: The Financial Prophet
Baidu - Risks Exist
While I remain committed to my bullish assessment, there are some risks that investors should consider before putting their money into Baidu. There are regulatory and political risks. For instance, the Chinese government could impose stricter guidelines relative to tech businesses in China, negatively impacting Baidu's shares. In addition, we may see sanctions or rising tensions with China in future years. The company could also underperform and produce less growth than expected. The underlying risks are plausible, and investors should consider these and other risks carefully before buying Baidu shares.
For further details see:
The Future Is Here - Baidu Is A Strong Buy