Baidu: A Top Recovery Chinese Big Tech Play For 2022
Summary
- Baidu’s core business is set to grow.
- A sale of the streaming platform iQIYI could drive a revaluation for shares of Baidu.
- Baidu’s valuation has been discounted heavily in 2021.
zorazhuang/iStock Unreleased via Getty Images
The last year was not a very good one for China's big three technology companies. Alibaba (BABA), Tencent Holdings (OTCPK:TCEHY) and Baidu (NASDAQ:BIDU) generated massive losses for shareholders in 2021 as the Chinese Communist Party cracked down heavily on monopolies. I believe, however, that 2022 could be a better year for China Big Tech and the discounted valuation of Baidu implies significant recovery potential!
Sell-off in 'Big Tech' creates an opportunity to buy heavily discounted shares
Shares of Baidu, Alibaba and Tencent Holdings dropped heavily in 2021 due to increasing pressure from the CCP and state authorities. Beijing is seeking to rein in large technology companies which stand accused of breaking anti-monopoly regulations. State regulators handed down fines on Chinese Big Tech firms this year and shares of Baidu lost about 30% of their value in 2021. Shares of Alibaba lost the most...
Baidu's core businesses are still growing
Despite Beijing's crackdown on private enterprises, Baidu's top line grew 13% year over year in the third-quarter due to a strong performance in the firm's core businesses. In Q3'21, Baidu had revenues of 31.92B Chinese Yuan which calculates to approximately $4.95B. Baidu Core, which includes online marketing and artificial intelligence services, generated revenues of 24.66B Chinese Yuan which is roughly $3.83B, showing an increase of 15 year over year. Although Baidu's top line was growing, the search engine giant was not profitable in Q3-21 due to a fair value adjustment in its long term investments of 18.9B Chinese Yuan which translates to roughly $2.98B.
(Source: Baidu)
Positive revenue outlook
Baidu's revenue forecast is impacted by slowing economic growth in China and by persistent uncertainty about the COVID-19 situation. However, the guidance is strong with fourth-quarter revenues expected to be between 31.0B and 34.0B Chinese Yuan, which is the equivalent of $4.81B-$5.27B. This outlook implies a revenue growth rate of 2-12% year compared to the year-earlier period. Baidu Core revenues are expected to grow between 5% and 16% due to Baidu's strong market position in search.
Strong free cash flow generation
Baidu's core internet business continued to produce strong results in the third-quarter. Free cash flow, excluding Baidu's streaming platform iQIYI (IQ), was 2.89B Chinese Yuan or $449M. Baidu has a 56% investment in iQIYI, a platform that had 103.6 million subscribers as of September 30, 2021. Baidu has looked into off-loading its money-losing streaming business last year but failed to secure a deal. I expect Baidu to monetize its iQIYI stake in FY 2022 or later at which point Baidu's free cash flow is set to improve. Until then, the streaming business continues to be a drag on Baidu's financial performance. A successful sale of iQIYI to another streaming company, inside or outside China, could also be a catalyst for shares of Baidu to power higher.
(Source: Baidu)
Baidu generates a lot of free cash flow quarterly. Because shares have fallen into a downtrend last year, Baidu now trades at a (very high) 7.25% free cash flow yield...
Baidu's valuation discount potential for sales growth
Baidu's revenue growth is facing some headwinds which are related to a stricter regulatory landscape. However, projections still indicate that strong revenue growth for Baidu is ahead. For FY 2022, the expectation is for the search giant to generate revenues of $21.93B, which implies an annual year over year revenue growth rate of 13%. Until FY 2024, Baidu is expected to grow revenues to $28.01B which also calculates to an annual revenue growth rate of 13%.
(Source: Seeking Alpha)
Baidu's sales growth is cheap, and perhaps too cheap. Based off of P-S and P-E, Baidu is a much better deal than Alphabet (GOOG) (GOOGL)...
Risks with Baidu
Chinese Big Tech stocks are risky and this includes Baidu. The CCP has great control and power over private enterprises, and state regulators could unleash a second round of anti-monopoly fines on Baidu and other tech companies at any time. The unpredictability of additional fines is a threat to Baidu's margins and to the stock. However, I believe Beijing has no interest in strategically weakening its leading tech companies and stifling their growth. While Baidu does have considerable operating risks in China, I believe the risk of an actual ADR delisting is very low.
Final thoughts
Baidu is a recovery stock heading into 2022. Growth projections are supported by Baidu's strong market position in search. Revenue projections indicate continual growth in the years ahead even though Chinese stocks are not very popular right now. A successful iQIYI sale in FY 2022 could drive a revaluation of Baidu. Because the firm's growth has been so heavily discounted in 2021, shares of Baidu have a risk profile that is heavily skewed to the upside!
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BIDU, BABA either through stock ownership, options, or other derivatives. 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.
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