There are few companies for which I see such massive return potential as for Baidu (BIDU). As I have outlined in my coverage initiation article, I believe Baidu has the opportunity to become Asia's highest valued business by 2030. I have argued that Baidu's search engine business and mobile ecosystem generates strong free cash-flow, while new innovation verticals such cloud (1), smart devices (2) and intelligent driving (3) are poised to support an enormous TAM expansion.
On August 30, Baidu presented Q2 2022 results and beat analyst consensus expectations on both topline and earnings. In addition, I present a few highly notable, new, upside catalysts that might support an accelerated price appreciation towards my $237.80/share target price. I am very confident to reiterate my Strong Buy recommendation
Since my Buy recommendation given on the 24th of July, Baidu stock has gained 5.5%, versus a flat performance for the S&P 500 (SPY). But in my opinion the Bull run has not even started.
During the period from April to end of June, Baidu Core (ex-iQiyi) achieved total sales of RMB29.65 billion. Although this represents a topline contraction of about 4% year over year, investors should note that analyst consensus had expected revenues of only about RMB28.45 billion, given the highly challenging macro-economic environment in China. Baidu's operating income was recorded at RMB3.40 billion, which represents a 2% year over year contraction, but a 31% quarter over quarter expansion. Higher net-profitability was achieved on the backdrop of a considerable 500 basis point margin expansion, from 17% in the first quarter of 2022 to 22% in the second quarter.
Q2 2022 revenues from Baidu AI Cloud grew by 31% year over year to RMB4.32 billion, as CEO Robin Li highlighted that the segment has 'outgrown' peers. Notably, this segment now accounts for 18% of Baidu Core revenues. The company said that operating margins for the segment improved both year over year and quarter over quarter.
Baidu AI Cloud was again ranked the No. 1 AI cloud provider, according to IDC's second half of 2021 report on China's public cloud market report, issued in June 2022.
Intelligent driving continued an impressive growth momentum. In the June quarter, Apollo Go provided 287K rides, growing 500% year over year, and the service has now reached one million accumulated rides. Moreover, in July 2022 Baidu unveiled its 6th generation robotaxi named 'Apollo RT6', which is an inhouse developed electric vehicle with LVL 4 autonomous driving capabilities. Robin Li commented:
We aim to put a sizable amount of RT6 vehicles into operation in the year 2024.
Finally, Baidu's legacy mobile ecosystem performed well: Baidu App's MAU reached 628 million, which is 8% growth year over year. According to the company, the ratio of DAU to MAU is 84%.
In addition to the strong quarter, which I consider an upside catalyst as well, there are a few notable upside catalysts that investors should consider.
Autonomous driving is arguably one of the hottest AI/tech verticals and Baidu has proven to be highly competitive in this market. On August 8th, Baidu announced having received the first-ever permit to operate fully driverless robo-taxis in China, specifically in the cities Wuhan and Chongqing.
One of the major worries for Baidu shareholders is the uncertainty surrounding ADR delisting from US exchanges. On Friday 28th of August, The China Securities Regulatory Commission and the U.S. Public Company Accounting Oversight Board announced that they have reached a deal and signed an agreement for cooperation on auditing the results of ADR-listed Chinese companies. Consequently, Goldman Sachs analyst Kinger Lau said that according to his model the risk of ADR delisting is now set at about 50%. This is truly a considerable improvement as compared to the estimated 95% de-listing risk from March 2022.
Baidu has been selected to be included in the Hang Seng Index from September 5. The Hang Seng is the lead index of the Hong Kong stock exchange and, in contrast to the CSI 300, skewed towards China's leading tech companies such as Alibaba (BABA), Tencent (OTCPK:TCEHY) and JD.com (JD). Baidu's inclusion in the index should support buying pressure for the stock, as for example institutional investors rebalance their portfolio.
Baidu's performance is closely connected to the health of the Chinese economy. In the past 12-18 months, this represented a material headwind to Baidu's performance, due to macro-economic headwinds that are well known to Seeking Alpha readers. But now, there are good signs that the Chinese economy could turn to provide a tailwind again. On August 25, China announced a RMB1 trillion investment program to support the economy. Notably, this program is in addition to the RMB7 trillion that have already been announced since April 2022. Moreover, while all western central banks start rising rates due to inflation, inflation is not (yet) a problem in China and the PBC has progressively lowered interest rates since early 2022 -- in sharp contrast to western central banks. Premier Li commented that the stimulus is now more 'forceful' than even in 2020.
In my opinion, Baidu's strong Q2 quarter highlighted the potential of the company's AI Cloud and intelligent driving segment. Valued at a P/S of approximately x2.7 and P/B of about x1.5 Baidu is one of the cheapest tech companies that an investor can buy. But as Seeking Alpha readers know, for a long time Baidu stock has been pressured by negative sentiment surrounding China equities. I believe recent developments have laid the groundwork for a more constructive outlook -- and accordingly for a material price appreciation for Baidu stock. I am confident to support a 'Strong Buy' recommendation for Baidu.
My coverage initiation article on Baidu: Baidu: Possibly China's Highest Valued Company By 2030 (NASDAQ:BIDU)
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Disclosure: I/we have a beneficial long position in the shares of BIDU 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.
Additional disclosure: not financial advise