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Any regular reader of Seeking Alpha would know that Chinese internet stocks had a disastrous 2021 in general. I suppose even casual readers would be aware of this. For the uninitiated, my year-end piece titled Chinese Internet Stocks: Death By A Thousand Cuts should bring you up to speed on the issues that the sector had suffered from last year.
Specific to Baidu Inc. (BIDU)(HKEX:9888), it had benefited from the family office of Tiger Cub Bill Hwang amassing a large position in its shares. Momentum traders and FOMO investors piled in, sending BIDU stock to a record high in February. However, the fairytale-like run-up began to unravel. The decline accelerated when investment banks rushed to execute a forced liquidation of Archegos Capital Management.
From the second quarter of 2021, regulatory headwinds and geopolitical tensions took their turns to keep BIDU stock suppressed, even as Baidu steadily announced technological advancements and business improvements. To be fair, BIDU stock has since been relatively resilient compared with its peers like Alibaba Group Holding (BABA) and Pinduoduo Inc. (PDD) while performing similarly with Meituan (OTCPK:MPNGF)(OTCPK:MPNGY).
BIDU share price chart
BIDU stock is up 11 times since its public listing in 2005. Many long-term investors are still holding profitable positions in Baidu.
BIDU share price % change chart
Looking at the share price percent off the high chart of BIDU stock though, I reckon long-term investors must have oftentimes lamented they should have taken profit of their stakes in the Chinese search engine, artificial intelligence [AI], and autonomous driving giant. Since its IPO, BIDU stock has suffered several episodes of large drawdowns from the highs. The latest swoon has BIDU down 57 percent off the February peak.
BIDU share price % off high chart
I have owned Baidu shares for a couple of years and while I believe in its business prospects, I certainly wondered many times, belatedly, if I should have at least trimmed my position in February last year. Reflecting on the sentiment then, I recall there was the impression that Baidu was on the cusp of finally being recognized for its multi-years investments into autonomous driving and artificial intelligence. Hence, it appeared that shareholders would be making a mistake to sell BIDU stock when other investors were rushing in.
In my article published mid-February last year titled Recent Spikes In Baidu And iQIYI Raising Eyebrows, I noted a further appreciation by BIDU could be ‘technically’ challenging:
“The stock’s strong push north took the shares past the price congestion channel in 2017-2018, a bullish sign. Nevertheless, the next technical hurdle is getting past the decade-long triangular pattern which could serve as a tough resistance. That is just a less than $40 gap though it could be a case of ‘so near yet so far’.
The share price surge has brought out shareholders who might be happy to finally get out of their long-suffering stakes at a profit as well as those who bought recently to take profit and bask in their quick success.”
However, with Baidu announcing several groundbreaking advancements in autonomous driving and on the AI front, I had expected analysts “to find new narratives to support a target price increase and upgrade the stock,” with the then share price 31 percent higher than the consensus price target. The anticipation was for a positive feedback loop to fuel even more stock gains.
Target prices did get revised upwards significantly, with the highest one reaching around $450. BIDU stock peaked at $354.82 and closed at $339.91 on February 19, 2021. The descent began and laggard analysts must have counted their blessings for delaying upward revisions in target prices.
The current price target for BIDU has fallen to $223.28 from around $355 in mid-February. However, even this is generous considering the 52 percent premium over the last closing price at $146.53. For much of the past three years, BIDU traded around the lowest price target on the stock. There was an aberration from December 2020 to April 2021. Nevertheless, from May 2021, BIDU resumed the hugging of the prevailing lowest price target on the stock.
Hence, until another larger whale like Bill Hwang accumulates a stake in Baidu, investors may be better off tracking the price target changes, particularly if the low side gets revised upwards. For now, it is a consolation for shareholders that the analyst rating on BIDU has climbed above 4.5 (out of 5) for the first time in its public history.
With a rating of 4.53 (Strong Buy), that is below its American peer Alphabet Inc (GOOG)(GOOGL) which scored 4.64 but above Alibaba Group’s 4.50. This bodes well for BIDU as it indicates more analysts are confident than ever of Baidu’s prospects in the coming year. Nevertheless, amid the unabated headwinds, it is understandable that Wall Street has been hesitant to raise its price targets.
BIDU analyst ratings history
When I bought BIDU, I was aligned with Cathie Wood’s strategy of looking at the investment on a five-year horizon. I was with her on several of ARK Invest holdings like Teladoc Health Inc. (TDOC) and Coupa Software Incorporated (COUP).
Unfortunately, my portfolio is rather disappointing at the moment. Looking at the two-year period, BIDU is up a mere 15.4 percent while TDOC and COUP are down 29.2 percent and 25.0 percent respectively.
Total Returns Comparison – BIDU, TDOC, COUP
Incidentally, BIDU was previously a component stock in the ARK Innovation ETF (ARKK), and the ARK Next Generation Internet ETF (ARKW). The ARK Autonomous Technology and Robotics ETF (ARKQ) continues to hold $26.4 million worth of BIDU shares even after a series of divestments.
It’s a cliché to say that Baidu’s vast lead in search engine is the cash cow, and its bright prospects hinge on its advanced AI and autonomous driving technologies, as well as its cloud computing business. However, that must be what attracted Bill Hwang, Cathie Wood, and scores of Baidu shareholders.
Every month, Baidu has key developments in those fields to report. At the 22nd China Patent Awards held on December 31, 2021, Baidu’s patent for Human-Machine Interaction Method and System Based on Artificial Intelligence, a technology developed by a team led by Baidu CTO Haifeng Wang, won (in Chinese) the China Patent Gold Award, the highest award in the field of intellectual property rights in China.
Earlier in December, Wang announced (in Chinese) that Baidu’s deep learning platform PaddlePaddle has the largest total market share in China. It has been used by more than 4.06 million developers and serves more than 157,000 enterprises and institutions, with nearly 500,000 models created.
Industry tracker Canalys reported on December 9, 2021, that Baidu’s market share of China’s cloud infrastructure market expanded from 7.8% in the second quarter of 2021 to 8.2% in the third quarter. The market share grab came amid an increase in the cloud infrastructure services expenditure in mainland China to $7.2 billion in Q3 2021 from $6.6 billion in Q2 2021.
In other words, Baidu is enjoying a greater cloud revenue from serving more of an enlarged market. Canalys noted that Baidu AI Cloud achieved annual revenue growth of 64.7% “due to an increasing customer base across the Internet, media, financial services, energy, manufacturing and public sectors.” It also remarked that Baidu remains “successful with its Smart Cloud industrial Internet project, which is being used in several cities in mainland China.” These successes are a result of Baidu’s multi-year effort in strengthening its cloud capabilities and they set a solid foundation for many more years of growth.
In early January this year, Baidu and its smart electric vehicle joint venture company JiDU Automotive announced that JiDU’s first production vehicle model will be powered by the NVIDIA (NVDA) DRIVE Orin SoC (system-on-chip). This next-generation vehicle with level four (L4) autonomous driving capability will be unveiled at the Beijing Auto Show in April, followed by mass production and delivery by 2023.
The announcement propelled Baidu into the first mainland company to give a definite time frame to launch a mass production car with L4 automation. Baidu’s deployment of its autonomous vehicles into large-scale commercial applications such as ride-hailing would be an important catalyst for its share price in the years to come.
While we continue to look five years ahead, it is comforting to know that Baidu has already immersed itself in the next hot buzzword of the future world – metaverse. Baidu Create 2021, the company’s three-day annual flagship developers’ conference, was hosted virtually on Baidu’s metaverse app XiRang. It was China’s first-ever tech event held in the metaverse. XiRang is capable of hosting 100,000 simultaneous online attendees in a single space.
Baidu Create 2021 – YouTube screengrab
Drawing a historical price channel for BIDU, we derive a range with $184.70 at the low end and $337.56 at the high end on February 1, 2027. Even if we consider BIDU stock hit the top of the range five years later, shareholders would have a 2.3 bagger. Decent returns but probably inadequate for many shareholders who are willing to hold their investments for five years.
BIDU stock five-year projection using its historical price channel
Therefore, the bull case is for a time when market players take Baidu seriously either as an autonomous driving technology provider, AI leader, or a major cloud computing provider. BIDU should then see a substantial re-rating. BIDU is trading at a price-to-earnings ratio of 18 times on a forward basis. Once investors regard Baidu as a major player in all three exciting fields, its PE ratio could triple or more. If its venture into the metaverse bears fruits, it would be another mega booster.
In my December article, I discussed extensively how Baidu’s “Do Better With Tech” programs can help it get into Beijing’s good book. Investors concerned about how China’s crackdown on the Chinese internet sector would suppress BIDU in the next five years are welcome to check out the piece and comment whether Baidu’s initiatives are as savvy as I deem them to be.
Until Baidu’s fantastic business developments materialize into concrete revenue and profit growth, market players would not be wrong to say BIDU is a ‘show me’ stock. Meanwhile, though, shareholders can be comforted with Baidu’s steady financial position and undemanding valuations as they wait for the anticipated appreciation to be delivered.
Baidu’s net cash, as measured by a negative net financial debt, stands at $14.6 billion. This is 27% of its market capitalization. In contrast, Alphabet Inc’s $127.7 billion in net cash represents 7.2% of its market cap.
Baidu’s net cash position versus its market cap
Baidu’s PE ratio has reverted to just below the average level since the beginning of 2020.
Baidu Inc PE Ratio (forward)
Similarly, Baidu’s price-to-book value ratio is now hovering above the lows of a two-year period but well below the average.
Baidu’s price-to-book value
Hence, to conclude, I rate BIDU stock a Buy at this level.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of BABA, BIDU, COUP, TDOC 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.