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After Earnings, Is Baidu Stock a Buy, a Sell, or Fairly Valued?

With advertising headwinds but potential growth in GenAI, here’s what we think of Baidu stock.

A view of the headquarter buildings of Baidu, China's dominant search engine, in Zhongguancun Software Park in Beijing, China Tuesday, May 14, 2019.
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Baidu BIDU released its first-quarter earnings report on May 16. Here’s Morningstar’s take on Baidu’s earnings and the outlook for its stock.

Key Morningstar Metrics for Baidu

What We Thought of Baidu’s Q1 Earnings

  • We expect advertising headwinds to persist into the second and third quarters of 2024, and we forecast about 1% revenue growth year on year in each quarter, and 2% for the full year. Management said it doesn’t know when the firm will recover toward its historical mid-single-digit growth. Weakness is driven by macroeconomic conditions.
  • Baidu remains highly confident that its generative artificial intelligence model will be a long-term earnings driver, as it is seeing demand from the application side. Clients are now diversified beyond the industrial and infrastructure sectors, and there is greater demand from domestic internet platforms throughout various industries.
  • The firm’s advertising demand from small and midsize enterprises remains muted, and hasn’t fully recovered since the reopening from the covid-19 pandemic.
  • Despite advertising weakness, we expect Baidu’s second- and third-quarter operating margin to be at similar levels to the same quarters in 2023, due to lower inference costs in its large language models and the company’s plan to run different computing stacks. Baidu said generative AI revenue was about CNY 1 billion this quarter, of which CNY 322 million came from AI cloud.

Baidu Stock Price

Fair Value Estimate for Baidu Stock

With its 4-star rating, we believe Baidu’s stock is undervalued compared with our long-term fair value estimate of $174 per share. The firm’s main revenue drivers will come from the Baidu Core businesses, mainly online advertising and AI cloud. Online advertising still accounts for 79% of Core revenue, and it will dictate near-term growth. However, growth has been decelerating, and long-term growth will likely hinge on the company’s AI cloud and smart driving businesses. We forecast a near-term (five-year) compound annual growth rate of 6% for Core online advertising, amid intensifying competition. Combined with Baidu’s other businesses, including iQiyi and AI Cloud, it should contribute to a 10% overall five-year CAGR.

Read more about Baidu’s fair value estimate.

Baidu Stock vs. Morningstar Fair Value Estimate

Economic Moat Rating

Baidu has a wide moat thanks to a network effect created by its dominant share of the user base and intangible assets stemming from years of R&D in AI. As one of the earliest internet companies in China, Baidu has built an ecosystem around search and successfully shifted to mobile internet by releasing various well-received mobile apps, such as its flagship Baidu app, which had 580 million monthly active users as of the second quarter of 2021, and Baidu Maps. According to web analytics firm Statcounter, Baidu’s market share as of September 2021 was 82.5%, compared with its closest Chinese competitor Sogou at 7.6%.

Read more about Baidu’s economic moat.

Financial Strength

Baidu’s balance sheet remains very well capitalized, with around CNY 236 billion in cash and short-term investments to support CNY 91 billion in total debt as of June 30, 2023. Its free cash flow was CNY 7.7 billion in 2022, which is sufficient to fund operations and maintain its moat through investments in new products.

Read more about Baidu’s financial strength.

Risk and Uncertainty

We think Baidu faces intense competition and uncertainty as to whether its AI business will generate satisfactory returns. Though it’s the largest search engine in China, the firm is competing with Tencent and ByteDance. It also competes with other internet companies for advertising dollars. Baidu’s margins have declined because of aggressive spending on video content and its mobile business.

Baidu also competes in AI, such as cloud computing, voice and image recognition, and autonomously driven cars. At the current stage, it is difficult to predict whether it will be the final winner here and if the ROI will be adequate.

Read more about Baidu’s risk and uncertainty.

BIDU Bulls Say

  • Baidu is strengthening its mobile ecosystem with search, livestreaming, and mini-programs, helping to create a closed-loop experience for users to acquire information and make transactions.
  • Baidu leads autonomous driving in terms of the number of miles tested, and the number of driving licenses in China could become another growth catalyst.
  • Sitting on a cash pile of over CNY 100 billion, Baidu has ample dry powder to invest in technology, particularly in AI, as well as merger and acquisition opportunities.

BIDU Bears Say

  • Alibaba BABA, Tencent, ByteDance, Kuaishou, and other social media platforms are competing with Baidu’s advertising budget, which will result in slow growth in revenue for Baidu search.
  • Despite numerous growth initiatives, there is great uncertainty as to whether these new businesses can be monetized successfully on a mass scale. Failure to do so would result in heavy margin drag.
  • Baidu’s leadership and brand in search have been weakened by more competitors entering the market, and could also be affected by future regulatory risks.

This article was compiled by Sokhoeun Noeut.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Kai Wang

Senior Equity Analyst
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Kai Wang is a senior equity analyst for Morningstar Asia Limited, a wholly owned subsidiary of Morningstar, Inc. He covers ex-Japan internet and healthcare platform and SaaS companies, with a particular focus on China.

Before joining Morningstar, Wang worked at Acuris, where he focused on China energy, tech, and industrial names. He started his career in fixed income in New York before switching over to equity research. He covered energy at Susquehanna and healthcare at Leerink Partners.

Wang has a bachelor's degree in economics from the University of Virginia and a Master of Business Administration from the USC Marshall School of Business.

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