VALUATION HIGHLIGHTS
- Baidu Core constitutes 44% of the Trefis price estimate for Baidu's stock.
WHAT HAS CHANGED?
- Latest Earnings
Baidu reported better-than-expected Q4 2024 results. While adjusted earnings stood at $2.63 per American depository share, revenue came in at $4.67 billion, down 2% year-over-year. While the online marketing business saw a year-over-year decline, this was partly offset by stronger growth in the cloud computing space.
- Focus on Generative AI
While Baidu has been spending heavily on AI-related research, the company is looking to double down on deploying the technology to consumers. The company is launching a rival to OpenAI's ChatGPT chatbot called Earnie bot, which is expected to integrate across all the company's offerings, beginning with search.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Baidu's value that present opportunities for upside or downside to the current Trefis price estimate for Baidu:
Search Services
- Baidu Core Revenue: We currently forecast that Baidu's core revenues will increase from $14.5 billion in 2024 to about $19 billion by the end of the Trefis forecast period. If the growth in the Chinese economy - particularly the e-commerce market - outperforms expectations, Baidu could benefit from a larger base of advertisers willing to pay for ad slots and prioritized search results. As a result, Baidu could generate higher revenues than we currently forecast. If the segment revenue increases to $24 billion by the end of our review period, there could be an upside of about 10% to the Trefis price estimate.
- iQiyi Revenues: We currently forecast iQiyi revenues to increase rapidly from $4.5 billion in 2024 to $6 billion by the end of our forecast period. Our assumption for the sustained growth in Baidu's paid subscriber base is mainly due to the expectation that Internet penetration in China will continue to rise. In addition, the penetration of smartphones in China is also expected to drive demand for video consumption. If penetration levels in China fail to increase in the next decade or competing for streaming services capture a higher market share, the growth rate of Baidu's user base could slow down. If iQiyi revenues increase to $9 billion, there could be a 5% upside to our price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Baidu at the top of the page.
BUSINESS SUMMARY
Touted as the Google of China, Baidu is the number one Chinese language search provider and the most visited website in China. Baidu's main search operation provides search for websites, audio files, and images.
Baidu offers a unique Chinese language search platform to both users and customers. This platform consists of its websites and the Baidu Union - a network of third-party websites and software applications. By generating traffic from its users, Baidu can attract business customers who wish to advertise their products and services alongside Baidu's search results and on Baidu's web properties.
SOURCES OF VALUE
Baidu makes the majority of its money from its search operations. Baidu's search advertising business is driven by two important factors that contribute to its significance:
Search market share dominance in China
Baidu dominates the search advertising market in China, with an estimated market share of over 80% (by revenue).
Though Qihoo 360 and Sogou have emerged as credible players in the desktop online search market, Baidu has gained dominance over the country's mobile search market. Baidu also competes with Bing and Google China in the domestic search market.
Demand from online advertisers for keyword advertising on Baidu sites could continue to cause upward pressure on Baidu's Revenue per Search.
KEY TRENDS
AI could shake up the search market
There are also concerns about the impact of AI on Baidu’s search operations. While Baidu has been investing considerably in AI with tools such as its Ernie chatbot, it may have to figure out competent monetization strategies since the technology deployed at the moment has less scope for advertisements. Moreover, AI-powered chatbots could disrupt traditional search as users seek direct answers rather than clicking through search results and ads. The competition in search could also become more intense, as Chinese tech players such as Alibaba and Tencent are developing competing large language models, which could challenge Baidu’s position in the search market.
Booming Online Video Market in China
The Chinese online video market has exploded in recent years, driven by the increasing penetration of smartphone users and high-speed internet in the region. This is expected to continue to drive iQiyi online video streaming revenues in the coming years.
