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Stock Strategist

Baidu's Undervalued for the Long Term

We think the wide-moat company’s strong network effect will allow it to weather the near-term storm.

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 Baidu (BIDU) is the largest Internet search engine in China. It has been evolving from a mobile-first to an artificial-intelligence-first company. We believe Baidu is still the technology leader in China, but it has been facing competition from other Internet companies, particularly Alibaba (BABA) and Tencent (TCEHY). In the near term, margins will remain under pressure as a result of aggressive content spending and talent acquisition costs for AI personnel.

Although Baidu’s search revenue and reputation were severely damaged in the Wei Zexi incident in early 2016, we believe that the worst has passed. Following the incident, Chinese authorities launched new regulations for online search and advertising, which clearly defined paid search results as advertising; the new regulations came into effect Sept. 1, 2016. As a result of stricter standards for online advertisers, Baidu’s active online marketing customers decreased 6% and its search revenue declined 0.5% in 2016. In 2017, Baidu’s online marketing service revenue growth recovered to 13% thanks to a low base in 2016.

Dan Baker does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.