Baidu's stock is trading close to multi-year lows.
It has been a tough time for investors in Baidu(BIDU 0.95%). After shares of the Chinese search engine reached their peak of $340 in 2021, they have, gone nowhere but down. Worse, in the last 12 months, when most artificial intelligence (AI) stocks like Nvidia and Palantir have outperformed massively, Baidu's stock has gone down by 38%.
Baidu's poor stock performance has attracted bargain hunters (myself included) to the opportunity of getting a good bargain. Here's what I have found after digging into the company.
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1. Baidu's core business remains highly profitable
Baidu is a classic example of how a high-growth company reached a relatively mature state and began to grow at a slower, less predictable pace. It was the de facto search engine in China in the early days, especially after its main competitor, Alphabet's Google, exited the market entirely in 2010.
Yet, thanks to the emergence of smartphones and social media networking apps like WeChat, the rapidly evolving tech landscape has gradually eroded Baidu's dominance in the search and advertising business. On top of that, a series of poorly executed investments in areas like food delivery and entertainment further impacted investors' confidence in the company's ability to regain its hyper-growth status.
While these are valid reasons to be concerned, investors should also consider the positive side of Baidu's core businesses, which consist of its online marketing (mainly search-related businesses) and non-marketing business, which consists of cloud computing and other businesses. This core business segment grew by 7% in 2023 and another 4% in the first quarter of 2024. This segment also generated 18.8 billion yuan ($2.7 billion) in operating profit in 2023, with a 19% operating margin. In other words, Baidu's core business remains healthy (and growing).
Baidu's core business has a vast user base of 676 million, covering close to half of the Chinese population. With such a massive number of users, Baidu's app has become indispensable to advertisers looking to reach their audiences, especially given the increasingly competitive technology industry, where companies try their best to capture user screen share and mind share.
So as long as Baidu can continue to delight its users and keep them engaged with its search engine or innovate to build new services or features to improve its product offerings, it stands a good chance to keep minting money from its core businesses.
2. AI presents massive optionality for Baidu to grow
Investors have been mainly bullish about AI companies since 2023, which explains the significant increase in the share price of these companies. Yet despite Baidu's massive investments and utilization of AI technologies in its business, investors have largely avoided the company.
However, they shouldn't, since AI could propel Baidu to the next stage of its evolution. Statista predicts that the AI market in China will reach $34 billion in 2024 and grow to $155 billion by 2030. As a leading player in AI cloud offerings, Baidu stands a good chance of capturing a reasonable market share.
For instance, Baidu launched its ChatGPT-like service called ERNIE Bot, which has already attracted 200 million users, is used 200 million times daily, and has reached 85,000 enterprises. ERNIE also started making money for the company. While impressive, this is probably just the tip of the iceberg of the enormous opportunities ahead.
Another example of Baidu's leading AI-related services is its autonomous driving service, Apollo Go. What started as a research project in 2013 has become a fully operational service. In the first quarter of 2024, Apollo Go provided 826,000 rides, 25% higher than the previous year. Cumulatively, the rides provided to the public have exceeded 6 million.
As Apollo continues to grow its cumulative rides, its AI system would likely improve further, fueling even better ride experiences in aspects like safety, area coverage, and cost. Eventually, robotaxis could become a substitute for taxis and car ownership, so if Apollo can maintain its leading position, it would generate enormous value for Baidu and its shareholders.
What it means for investors
Baidu is an established tech giant in China with a long track record of profitability and tremendous optionality to grow by leveraging the AI tailwind. The risk, however, lies in whether the company can execute to capture the immense opportunities ahead. Besides, investors must endure the risks of investing in a Chinese company, dealing with regulatory uncertainties, geopolitical tension, etc.
For those who can stomach those risks, Baidu is a stock to watch.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Baidu, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
