Why Is Baidu Stock Rallying?

Chinese search engine behemoth Baidu’s stock (NASDAQ: BIDU) has witnessed a solid rally over the last month, gaining over 40%, compared to the broader S&P 500 which was up about 4% over the same period. However, the stock still remains down by about 18% over the past year, and by almost 55% from all-time highs seen in early 2021. So what’s driving the recent gains and will the momentum hold up for Baidu? 

There are a couple of factors driving the recent gains. Firstly, Baidu posted a better than expected set of Q1 2022 results, as demand for its cloud and artificial intelligence products remained strong, although the ad-driven search business faced pressures due to macro headwinds and weaker consumer spending. Revenue for the quarter rose by 1% year-over-year to 28.4 billion yuan ($4.48 billion) with revenue for the Baidu AI Cloud rising 45% year-over-year. Adjusted earnings were also well ahead of consensus estimates, due to the company’s strong cost management.

There have also been signs that the Chinese government’s crackdown on the tech sector could ease. In mid-May, Chinese Vice Premier Liu He indicated that the country would “properly manage” the relationship between the Chinese government and the industry while supporting the listing of technology companies on domestic and foreign exchanges. This could reduce fears of further regulatory pressure on China’s big tech space while giving investors some confidence about the future of stocks listed on U.S. exchanges. Baidu, for instance, was placed on a provisional watchlist of foreign companies that might face delisting from U.S. exchanges earlier this year. There are hopes that economic growth in China could also pick up as the government looks to ease the strict lockdowns and harsh zero-Covid policies that it imposed in multiple cities and provinces following a surge in Covid-19 cases in recent months. This could also be seen as a positive sign for the economy and high-profile tech players such as Baidu.

To be sure, there are still multiple risks for the company. There are concerns about economic growth even as China emerges from the Covid-19 lockdowns, given the weak real estate market,  high commodity prices, and trade tensions with the U.S.  Competition is also mounting in fast-growing areas such as cloud computing, with the likes of Alibaba, Tencent, and Huawei also offering compelling services. However, we still believe that Baidu’s stock is undervalued. At its current market price of about $153 per share, Baidu trades at just about 21x 2023 earnings. The multiple falls to just over 10x if we exclude Baidu’s sizable $25 billion-plus in cash holdings, which account for roughly half its overall valuation. Baidu is still expected to grow at a reasonable pace in the coming years. Consensus estimates point to over 4% growth for 2022, due to headwinds in China, although growth is expected to pick up to about 14% in 2023.

We estimate Baidu valuation at about $204 per share indicating a potential upside of 33% over the market price.  See our analysis of Baidu revenues for more details on how Baidu’s revenues are likely to trend.

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[1] Month-to-date and year-to-date as of 6/9/2022
[2] Cumulative total returns since the end of 2016

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