Down 6% This Year, Will Baidu’s AI Business Lead The Stock Higher Following Q1 Results?

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Chinese search engine behemoth Baidu’s stock (NASDAQ: BIDU) is poised to report its Q1 2024 earnings on May 16. We expect Baidu’s revenues to come in at $4.34 billion for the quarter, marking a decline of about 1% compared to last year. We estimate that earnings are likely to come in at about $2.22 per share. So what are some of the trends that are likely to drive Baidu’s earnings for the quarter? 

Over Q4 2023, Baidu reported revenue of 34.95 billion yuan (about $4.9 billion), up 6% year-over-year, while adjusted net income came in at 7.76 billion yuan, up about 44% compared to the prior year. Growth was driven primarily by the company’s online marketing business, which sells advertising. Demand for search advertising and online marketing picked up in China as more businesses look to target customers following China’s economic reopening. However, we believe that the online marketing business could see a slight slowdown over the first quarter as growth in consumer spending slows.

Baidu is viewed as an AI leader of sorts in China, with a search engine and self-driving taxi arm called Apollo Go. Over the previous quarter, non-marketing-related revenues rose to 8.3 billion yuan ($1.17 billion), up 9% year over year, mainly driven by the AI Cloud business.  Tesla is reportedly working with Baidu on rolling out its self-driving features in China, using the latter’s mapping and navigation tools, per Nikkei. Apple is also reportedly working with Baidu to use its generative artificial intelligence technology in its devices in China. That said, Baidu’s AI business could be impacted in part by the U.S. curbs on the supply of advanced semiconductors to China. While Baidu has its own proprietary Kunlun AI chips, which could help it soften the impact, chips made by the likes of Nvidia remain the most sophisticated AI chips.

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BIDU stock has suffered a sharp decline of 50% from levels of $215 in early January 2021 to around $110 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. Notably, BIDU stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -31% in 2021, -23% in 2022, and 4% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that BIDU underperformed the S&P in 2021, 2022, and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the mega-cap stars GOOG, TSLA, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could BIDU face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

So, is Baidu stock attractive at current levels of about $112 per share? We believe it is. Baidu trades at just about 10x consensus 2023 earnings. This is well below the nearly 40x multiple the company traded at back in February 2021.  Moreover, Baidu had a sizable cash position of over $18 billion as of the end of Q4 2023, accounting for over 40% the company’s current market cap. This means that the company’s 2024 P/E multiple, ex-cash would stand at a mere 6x, making the stock an even better value. We value Baidu stock at about $119 per share, which is slightly ahead of the market price. We will be revisiting our price estimate for the company post its Q1 earnings release. 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.

 Returns May 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 BIDU Return 8% -6% -32%
 S&P 500 Return 4% 9% 133%
 Trefis Reinforced Value Portfolio 4% 4% 636%

[1] Returns as of 5/14/2024
[2] Cumulative total returns since the end of 2016

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