Baidu’s Shares Look Very Undervalued Despite Expected Revenue Headwinds

by Trefis Team
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Baidu (NASDAQ:BIDU) announced its Q1 results late last week, with the Chinese technology reporting its first quarterly loss in fifteen years, even as revenues came in line with expectations. Baidu’s weak revenue outlook coupled with the unexpected loss led the company’s stock almost 17% lower within hours of the earnings announcement.

The company’s management expects near-term headwinds in China’s online marketing space until government policies to improve the condition of SMEs take shape. Baidu’s focus also appears to have shifted towards organic revenue growth. In view of these factors, and the risks associated with the U.S.-China trade war, we have lowered our fair value estimate of Baidu’s stock price to $175 per share. Our interactive dashboard about Baidu’s Price Estimate outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on the company’s valuation. Also, you can see more Trefis technology company data here.

A Quick Look At Baidu’s Revenue Sources

Baidu makes money through advertising and content subscription services (similar to Netflix). The company also has other developing avenues of revenue generation such as cloud and autonomous driving. There are two main segments of Baidu’s revenues, which were $15 billion for full-year 2018:

  • Baidu Core (fiscal 2018 revenue of $11 billion, 76% of total revenue): Segment revenues are derived from advertising income and related services for merchants. Baidu continues to be the largest search engine in China with a market share of roughly 70%.
  • iQiyi (fiscal 2018 revenue of $4 billion, 24% of total revenue): Segment revenues are derived from subscription of streaming and content marketing services. iQiyi is also known as the Netflix of China.

Revenue trends and fiscal 2019 expectations

  • Baidu added $5 billion in total revenue from 2016 to 2018 (CAGR of 21%)
  • Revenue growth was driven by Baidu Core, which added $3 billion in revenues over the same period at a CAGR of 15%. Revenue from online marketing reached $2.63 billion (-4% y-o-y in USD and +3% in RMB) for Q1 2019 thanks to strength in education, retail and business services. However, healthcare, online games and financial services brought in lower revenues. We expect revenues for this segment to be $12 billion (+7% y-o-y) in 2019.
  • For iQiyi, revenue growth has been at a CAGR of 49% with the division adding $2 billion in revenues the last two years. These revenues witnessed strong growth in Q1 2019 thanks to steady gains in iQiyi membership services, and we expect this trend to continue for the rest of the year – helping segment revenues to grow to $5 billion (+28% y-o-y) in 2019.

We forecast Baidu’s EPS figure for full-year 2019 to be $7.40. Taken together with our forward P/E multiple of 24x for the company, this works out to a $175 per share price estimate for the company’s stock, which is about 35% above the current market price. While we recognize the downside risks associated with the slowdown in China, we believe that the recent sell-off in Baidu’s stock was overdone – leaving its shares considerably undervalued.

Do not agree with our forecast? Create your own price forecast for Baidu by changing the base inputs (blue dots) on our interactive dashboard.

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