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

Key Morningstar Metrics for Baidu 

Fair Value Estimate: $183.00 

Morningstar Rating: 5 stars 

Morningstar Economic Moat Rating: Wide 

Morningstar Uncertainty Rating: High 

What We Thought of Baidu’s Q4 Earnings 

Revenue become in step with expectations, but running margins were lower than anticipated due to lower marketing sales (which has high operating leverage) and the price of Baidu’s synthetic intelligence initiatives. We assume while the AI charges are possibly quick-time period and must improve through the years as computing power and structure get higher, there's some problem over the growth of the advertising commercial enterprise within the medium time period. It is pushed by means of China’s macro overall performance, and Baidu did no longer have appropriate visibility for it in 2024.

If an investor still desires exposure to AI leadership in China, Baidu will be the high-quality preference, because the corporation’s cloud sales is outgrowing that of competitors on the returned of its AI merchandise. Despite the macro weak spot, advertising and marketing is likewise seeing a slight increase uptick because of AI. On the flip side, China’s macro weakness and geopolitical risks in trendy may additionally scare off traders who decide on close to-term balance.

Given the long-time period capability of Baidu’s AI merchandise, we think stocks appearance reasonably-priced whilst wondering past the close to-time period headline risks for China. For example, cloud sales changed into forecast to grow in mid-single digits in 2024, but because of AI, it's far now anticipated to reach double digits, which need to offset some of the macro weak spot.

Fair Value Estimate for Baidu

With its 5-star rating, we trust Baidu’s inventory is undervalued compared with our lengthy-term fair fee estimate of $183. The firm’s important sales drivers will come from the Baidu Core agencies, in particular online advertising and marketing and AI cloud. Online advertising and marketing nonetheless money owed for seventy nine% of Core revenue, and it'll dictate near-time period growth. However, increase has been decelerating, and long-term increase will likely hinge on the company’s AI cloud and smart driving organizations. We forecast a close to-term (five-12 months) compound annual growth rate of 6% for Core on-line advertising, amid intensifying competition. Combined with Baidu’s different corporations, such as iQiyi and AI Cloud, it must make contributions to a 10% standard 5-year CAGR.

Margins are also a key value driving force. There is a loss of scalability for iQiyi because of the steady want to incur high content prices, and this could create margin drag. We also believe AI Cloud and rising technologies will see more R&D spending, given their early life cycles, and for this reason Baidu’s truthful cost estimate will be dictated by using when (if at all) those businesses can monetize with scale. We’ll use conservative margins in our forecast till there may be higher visibility for those tasks.

Economic Moat Rating

Baidu has a extensive moat way to a community impact created via its dominant proportion of the person base and intangible assets stemming from years of R&D in AI. As one of the earliest internet companies in China, Baidu has constructed an surroundings round seek and effectively shifted to mobile internet through freeing numerous well-acquired mobile apps, which includes its flagship Baidu app, which had 580 million month-to-month active customers as of the second region of 2021, and Baidu Maps. According to web analytics organization Statcounter, Baidu’s market percentage as of September 2021 turned into eighty two.5%, compared with its closest Chinese competitor Sogou at 7.6%.

Baidu has a big database of user conduct records in China, which its AI seek engine has accumulated over nearly two a long time. This is crucial in producing the maximum relevant results, which results in accelerated utilization, greater information, and better advertising performance. Meanwhile, Baidu has built up a network effect and a fantastic feedback loop in its search enterprise through leveraging its widespread search visitors on both PC and cellular gadgets.

This is difficult for its competition to duplicate, as it would take a long term to attain a consumer database and advertising purchaser base of a similar size. The larger its person base, the extra information Baidu can gather and analyze, enhancing the quest engine set of rules and the relevancy of search results. Users obtain higher, greater tailor-made pointers, making it much less probably that they’ll use some other seek engine. With so much user information, Baidu can provide personalized marketing techniques so advertisers can higher target customers. This effects in advertisers turning into more willing to pay extra for promoted commercials and priority positioning.

Risk and Uncertainty

We suppose Baidu faces extreme opposition and uncertainty as to whether or not its AI business will generate pleasant returns. Though it’s the most important search engine in China, the corporation is competing with Tencent and ByteDance. It additionally competes with other net companies for advertising and marketing bucks. Baidu’s margins have declined because of competitive spending on video content and its cell business.

Baidu also competes in AI, along with cloud computing, voice and photo recognition, and autonomously driven cars. At the modern degree, it's miles hard to predict whether it'll be the final winner right here and if the ROI can be good enough.

Baidu is strengthening its mobile surroundings with search, livestreaming, and mini-applications, helping to create a closed-loop revel in for customers to collect facts and make transactions.

Baidu leads independent driving in terms of the number of miles tested, and the variety of using licenses in China may want to end up every other increase catalyst.

Sitting on a cash pile of over CNY one hundred billion, Baidu has sufficient dry powder to invest in era, specially in AI, in addition to merger and acquisition possibilities.

BIDU Bears Say

Alibaba BABA, Tencent, ByteDance, Kuaishou, and different social media structures are competing with Baidu’s advertising and marketing budget, which will bring about slow growth in revenue for Baidu seek.

Despite numerous boom projects, there is superb uncertainty as to whether these new corporations can be monetized efficaciously on a mass scale. Failure to do so might bring about heavy margin drag.

Baidu’s leadership and logo in search were weakened by means of greater competitors entering the marketplace, and could also be suffering from destiny regulatory risks.