Baidu: Cruisin' In The USA

| About: Baidu, Inc. (BIDU)
This article is now exclusive for PRO subscribers.


The WSJ reported that Baidu is planning to test its driverless car in the US this year.

Given the competitiveness of China's fast-growing internet space, driverless tech could potentially be a differentiator for Baidu.

I remain cautious on the company's near-term outlook and competitive risk, but like the long-term prospects if AI and cloud execute.

The Wall Street Journal reported that Baidu (NASDAQ:BIDU) will be testing its driverless cars in the US as part of its effort to introduce a commercially viable model by 2018. Given the well-established infrastructure, a more experienced driver base and proven experiments done by Alphabet (GOOG, GOOGL), the US offers perhaps one of the better settings for BIDU to test and improve its driverless technology.

In my view, BIDU's goal of commercializing a driverless vehicle in the next three years is quite ambitious, but it is necessary for the search giant to diversify its revenue stream beyond online search. Worth noting, although GOOG has been sustaining its search revenue in recent years, the long-term growth outlook for the company is its "Other Bets" (i.e., home automation, payment, broadband, wireless, life sciences, etc.). BIDU has yet to achieve similar "other bets" other than the driverless car, so it is necessary for the company to succeed in order to diversify and, more importantly, offer a differentiated product/service from Alibaba (NYSE:BABA) and Tencent (OTCPK:TCEHY), given both these rivals have established a formidable presence in the fast-growing internet verticals across China. While I am cautious on the company's near-term outlook, I do acknowledge that projects involving autonomous vehicles, artificial intelligence and cloud services could give BIDU a sustainable competitive advantage in the long run.

According to BCG, the driverless car market is expected to hit $42 billion by 2025, with China expected to be the largest market. More important, Chinese consumers are more open to automated driving than those in the US and Germany, and are willing spend more on connected devices than the developed market, per Nielsen estimates. This presents a favourable macro tailwind for BIDU's driverless cars ambitions in China.

Testing the vehicle in the US not only allows BIDU to enhance its driverless technology, but also presents an option for the company to license its technology to other automakers in the US. Although GOOG's driverless technology has been proven to be effective, the success of BIDU's technology could give the automakers an alternative driverless standard and allow the company to compete directly against GOOG in the US. Under this scenario, BIDU could license the technology to the automakers at a lower price point, arguing that its technology has been proven to be effective on North American roads. This is a similar tactic used by many modern-day Chinese exports, such as electronics and military hardware. The challenge with BIDU lies in its map technology, which does not cover North American road data. Many autonomous vehicles source their map data from GOOG or Nokia (which was sold to German automakers last year), so BIDU has to source data from one of the content providers in order to operate its vehicle. This is different in China, where the company is partnering with NavInfo on map content and data.

In conclusion, BIDU's driverless ambition is a positive indicator that the company is moving forward to differentiate itself from BABA and TCEHY. I believe that the long-term catalyst depends on the execution over artificial intelligence and driverless technology.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.