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

Baidu BIDU released its fourth-quarter earnings report on Feb. 18. Here’s Morningstar’s take on Baidu’s earnings and stock.

Key Morningstar Metrics for Baidu

• Fair Value Estimate: $157.00
• Morningstar Rating: ★★★★★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Baidu’s Earnings

Baidu’s December-quarter revenue declined 2% year on year to CNY 34.1 billion. AI cloud revenue grew 26% year on year while advertising revenue continued to fall.

Why it matters: The AI cloud business remains a highlight for Baidu, and the results support our view for it to be a long-term growth driver that should offset more anticipated weakness from advertising.

• AI cloud revenue of CNY 7.1 billion accounted for 26% of overall Baidu core revenue in the quarter.
• The slide in advertising revenue is within expectations and reflects overall macroeconomic weakness in China.

The bottom line: We maintain our fair value estimate for Baidu, as the company’s AI cloud revenue should see continued tailwinds despite muted demand for the advertising business. We believe the shares are undervalued.

• Baidu indicated that AI cloud will continue to see strength in 2025. We tweaked our earnings forecast to reflect double-digit AI cloud revenue growth for the year, which should offset advertising headwinds.
• Overall, we continue to expect 2025-26 earnings to remain sluggish before growth picks up in 2027.

Coming up: Baidu did not provide guidance but expects advertising revenue to turn positive in the second half of 2025. This suggests more revenue declines in the first half of 2025.

• Baidu will no longer charge users for its AI model, Ernie, following the same strategy as competitors. We do not expect this to materially lower our forecasts.
• Baidu is starting to roll out operations for its robotaxi service Apollo Go in Hong Kong. We do not expect this segment to materially contribute to revenue in the near term, but a successful trial could mean greater monetization.

Big picture: Given DeepSeek’s success, Baidu is moving toward an open-source model for Ernie for other developers to adopt. Baidu believes that eventual success will be based on the adoption of its AI cloud platform, and the firm hopes opening up Ernie can facilitate this.

Fair Value Estimate for Baidu

With its 5-star rating, we believe Baidu’s stock is significantly undervalued compared with our long-term fair value estimate of $157 per share. The main revenue drivers will come from Baidu Core’s businesses, mainly online advertising and AI cloud segments. 73% of Core revenue still comes from online advertising, which will dictate near-term growth. However, growth has been decelerating, and long-term growth will likely hinge on its AI cloud and smart driving businesses. We forecast the near-term (five-year) compound annual growth rate for its Core online advertising business to be 6% amid intensifying competition. Combined with its other businesses, including iQiyi and AI Cloud, it should contribute to a 10% five-year CAGR overall.

Read more about Baidu’s fair value estimate.

Economic Moat Rating

Baidu’s wide economic moat is created by its network effect from a dominant share of the user base and intangible assets from years of AI development and research and development. 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%.

Baidu has a large database of user behavior data in China, which is critical in generating the most relevant results for users, leading to increased usage, more data, and higher advertising efficiency. Meanwhile, the firm has built up a network effect and a positive feedback loop in its search business by leveraging its significant search traffic on both PC and mobile devices. This is difficult for its competitors to replicate, as it would take a long time to achieve a user database and marketing customer base of similar size.

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 assign Baidu a High Uncertainty Rating, as we think it faces intense competition and uncertainty about whether its AI business will generate satisfactory returns.

Though Baidu is the largest search engine in China, it is competing with other internet giants Tencent and ByteDance. It also competes with other internet firms for advertising dollars. Baidu’s margins have declined because of aggressive spending in video content and mobile business.

Baidu also competes in AI, such as cloud computing, voice and image recognition, and autonomous cars. At the current stage, it’s difficult to predict if Baidu will be the final winner in AI and whether 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 is a leader in autonomous driving in terms of the number of miles tested, which 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 in advertising budgets, which will result in slow growth in revenue for Baidu search.
• Despite numerous growth initiatives, there is great uncertainty about whether the 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 such as Sogou and could be affected by future regulatory risks.

This article was compiled by Gautami Thombare.