Will Baidu’s AI Innovations Boost The Stock Post Q2 Results?

Chinese search engine behemoth Baidu’s stock (NASDAQ: BIDU) is poised to report its Q2 2024 earnings around August 22. We expect Baidu’s revenues to come in at $4.7 billion for the quarter, roughly flat compared to last year and in line with consensus estimates. We estimate that earnings will likely come in at about $2.60 per share, marginally ahead of consensus. So what are some of the trends that are likely to drive Baidu’s earnings for the quarter? 

Over Q1 2024, Baidu reported revenue of 31.513 billion yuan (about $4.37 billion), up 1% year-over-year, while adjusted net income came in at 7.01 billion yuan ($971 billion), up about 22% 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 slightly in China as more companies look to target customers online following China’s economic reopening. However, we believe that the online marketing business could see some headwinds over the second quarter as growth in consumer spending slows in China. The Chinese economy grew by 4.7% in the second quarter from a year earlier. Moreover, retail sales of consumer goods, which is an indicator of household spending, rose by just 2% in June, well below estimates.

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 6.8 billion yuan ($935 million), up 6% year over year, mainly driven by the AI Cloud business. While the cloud business could see some headwinds as businesses scale back on IT spending given the mixed economy, we will be focusing on the performance of the AI business.  Over the last quarter, Baidu indicated that PaddlePaddle, the open-source deep learning platform it developed, now has about 13 million developers on board. The company has also been expanding its ERNIE family of large language models, by launching several lightweight models that are more cost effective.

BIDU stock has suffered a sharp decline of 65% from levels of $215 in early January 2021 to around $80 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 AAPL, MSFT, 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?

We think Baidu stock is attractive at current levels of about $84 per share. Baidu trades at under 8x consensus 2024 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 almost $26 billion as of the end of Q1 2024, while its debt stood at about $9.5 billion. This implies that Baidu’s net cash position stands at $16.5 billion, accounting for over half the company’s current market cap. We value Baidu stock at about $127 per share, which is well ahead of the market price. We will be revisiting our price estimate for the company post its Q2 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.

[1] Returns as of 8/6/2024
[2] Cumulative total returns since the end of 2016

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