Baidu the “Google of China” (NASDAQ:BIDU)
Baidu is known as China’s Google but investors are overlooking the potential in Baidu’s artificial intelligence, cloud and electric vehicle units.
Why are we excited? Baidu’s advertising sales growth has been relatively flat. but where it gets interesting is its artificial intelligence (AI), cloud and autonomous driving businesses…
- After 8 quarters of nearly flat growth, Baidu’s revenue exploded 25% in the first quarter of 2021.
- In the first quarter, Baidu’s non-advertising (AI) business grew 70%.
- While the majority of Baidu’s revenue is made from advertising, it expects non-advertising revenue to exceed advertising revenue in the next 3 years.
See full article here.
What’s the upside? Baidu has several units that have barely been included in its current valuation — given the speculative nature of these units:
- Baidu is the leading player for autonomous vehicle tech in China — which isn’t expected to commercialize its robo-taxi fleet until 2025.
- In Jan, Baidu announced a partnership with Geely to develop an electric vehicle — utilizing Baidu’s self-driving tech.
While many of these are long-shots, the near-term upside is Baidu’s AI and cloud business. As Baidu’s revenue moves toward AI, its valuation could move to reflect the move away from ad sales.
Where’s the margin of safety? Aside from regulatory risks from China’s government, Baidu has several factors that could limit the downside:
- Baidu is highly profitable with a 21% net income margin in 2020 —
- At an 11x Sales/EBITDA multiple, Baidu is nearly half the multiple of its US counterpart, Google — giving it a fair valuation.
- With a cash & short-term investments balance of nearly $25b and less than $12b in long-term debt, Baidu is in a strong financial position.
What are the biggest risks? Regulations and trade wars:
- Increased regulations from the Chinese government. In Mar 2021, Baidu was among a dozen companies fined by the Chinese government — in relation to a crackdown on the internet sector.
- An ongoing trade war between the US and China could impact Baidu. In March, the US adopted a rule that could delist Chinese companies that fail to comply with auditing requirements from a US firm.
Why now? Over the past few months, several factors down — which had nothing to do with Baidu’s fundamentals — pushed Baidu’s stock down 40%:
- A sell-off in Chinese stocks from political China’s regulation on Chinese tech giants and US/China tensions.
- Archegos, a family office, was forced to sell its position in Baidu, which led to margin calls and sent Baidu’s stock down.
The impact from external factors has given investors a better entry into its stock compared to a couple months ago, when it was trading at all-time highs.