Chinese search engine behemoth Baidu’s stock (NASDAQ: BIDU) has fared better than its peers, rising by about 23% year-to-date, performing slightly better than the broader Chinese indices, although it has underperformed the Nasdaq-100, which remains up by about 40% year-to-date. There are several trends helping Baidu stock. Baidu posted a stronger-than-expected set of Q2 2023 results with demand for its search advertising and online marketing picked up as more businesses look to target customers following China’s economic reopening. While adjusted earnings per American depositary share, or ADS, rose 43% year-over-year to RMB 22.55 (about $3.11), revenues rose 15% to RMB 34.06 billion, or $4.7 billion. Growth was driven by the company’s iQIYI and Baidu Core operations, with earnings getting a boost from better operating leverage. The big surge in interest in artificial intelligence, following the success of the viral ChatGPT, fueled AI-focused stocks such as Nvidia surging. Baidu is viewed as an AI leader of sorts in China, with a search engine and self-driving taxi arm called Apollo Go. The company launched “Ernie Bot,” a chat assistant that rivals ChatGPT earlier this year, while its autonomous ride-hailing business is also growing, delivering 714,000 rides in Q2, up 149% since last year. This progress could also be driving the stock higher. The company is using its own proprietary Kunlun AI chips, which could help it soften the impact of the U.S. curbs on the supply of advanced semiconductors to China.
Notably, BIDU stock had a Sharpe Ratio of 0.1 since early 2017, which is lower than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
So, is the stock still a buy at current levels of about $147 per share? We believe it is. Baidu trades at just about 14x consensus 2023 earnings. This is well below the nearly 40x multiple the company traded at back in February 2021. Moreover, Baidu had a sizable net cash position of over $17 billion as of the end of Q2 2023, accounting for about a third of the company’s current market cap. This means that the company’s 2023 P/E multiple, ex-cash would stand at a mere 9.5x, making the stock an even better value. We value Baidu stock at about $165 per share, which is 30% ahead of the market price. See our analysis of Baidu Revenue and Baidu Valuation for more details on how the company’s revenues are trending and how its valuation compares with peers.
|S&P 500 Return||0%||18%||102%|
|Trefis Reinforced Value Portfolio||1%||32%||578%|
 Month-to-date and year-to-date as of 9/4/2023
 Cumulative total returns since the end of 2016