Why Baidu Stock Looks Undervalued At $123

Chinese search engine behemoth Baidu’s stock (NASDAQ
NDAQ
: BIDU
IDU
) has fared better than its peers, rising by about 7% year-to-date, performing slightly better than the broader Chinese indices, although it has meaningfully underperformed the Nasdaq-100, which remains up by about 30% year-to-date. The Chinese economy has fully re-opened following the easing of strict Covid-19 restrictions late last year, and this has had a varied impact on technology firms. While e-commerce players such as Alibaba and JD.com saw sales cool a bit in Q1, likely as customers moved more spending to brick-and-mortar stores, digital advertising players have fared well. Over Q1 2023, Baidu posted a stronger-than-anticipated set of results, as businesses increased their advertising spending in order to capture growing consumer spending. While overall revenues rose by about 10% year-over-year to RMB 31.144 billion (about $4.54 billion), adjusted net income rose 48% to RMB 5.727 billion ($834 million). Baidu’s digital advertising business saw revenue rise by 6% compared to last year. The company’s adjusted operating margins also trended higher to 23% in the quarter, up from 17% in the same period last year driven by better cost absorption, lower content and bandwidth costs.

So, is the stock still a buy at current levels of about $123 per share? We believe it is. Baidu trades at just about 12x consensus 2023 earnings and about 11x consensus 2024 earnings. This is well below the nearly 40x multiple the company traded at back in February 2021. Moreover, Baidu had a sizable net cash position of over $15 billion as of the end of Q1 2023, accounting for over a third of the company’s current market cap. This means that the company’s 2023 P/E multiple, ex-cash would stand at a mere 8x, making the stock an even better value. While the reopening of the Chinese economy could help Baidu’s core advertising business, the company also appears to be making good progress in the AI space and this could help to potentially re-rate the stock higher eventually. The company launched its ERNIE Bot, a generative AI tool in China, and plans to incorporate this into all of its businesses. The company is using its own proprietary Kunlun AI chips, which could help it soften the impact of the U.S. curbs on the supply of advanced semiconductors to China. Baidu’s autonomous ride-hailing service, provided around 660,000 rides in the first quarter of 2023, up 236% year over year. We value Baidu stock at about $167 per share, which is 30% ahead of the market price. 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.

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