Baidu (NASDAQ: BIDU) CEO Robin Li recently highlighted some of the tech giant's accomplishments, long-term strategies, and challenges in a letter to his employees. Let's highlight Li's four key points, and what they could mean for Baidu's stock -- which lost a third of its value in 2018 on concerns about trade tensions, a depreciating RMB, and the decelerating growth of the Chinese economy.
1. Exceeding 100 billion RMB in revenue in 2018
Li stated that Baidu generated more than 100 billion RMB ($14.5 billion) in revenue in fiscal 2018, which ended on Dec. 31. Li didn't provide an exact figure, but analysts expect Baidu to generate 101.45 billion RMB in revenue for the year -- which represents 20% growth from 2017.
Image source: Getty Images.
Meeting or topping that forecast would be impressive, since it indicates that Baidu's sales growth didn't decelerate from its 20% growth in 2017 and that its core advertising business remains healthy.
During the third quarter, Baidu's online marketing revenue rose 18% annually, its number of active online marketing customers grew 7%, and its average revenue per marketing customers climbed 12% -- indicating that it wasn't losing advertisers to rival platforms like Tencent's (NASDAQOTH: TCEHY) WeChat.
2. Focusing on AI and cloud computing
Like Tencent and Alibaba (NYSE: BABA), Baidu recently restructured its business to focus more on the growth of its AI, big data, and cloud-computing ("ABC") divisions. Baidu is already a major player in the AI market with its DuerOS virtual assistant platform for connected devices and its Project Apollo platform for autonomous vehicles, but more aggressive investments in these markets could widen its moat against Tencent and Alibaba.
Last quarter, Baidu stated that DuerOS had an installed base of 141 million devices in September, up from just 100 million in July. Baidu is also the third-largest smart-speaker maker in China after Alibaba and Xiaomi, according to Canalys, and it's the fastest-growing brand of the three thanks to the popularity of its cheap Xiao DU speakers.
In his letter, Li stated that the "historical transformation" of AI would penetrate multiple industries to unleash the market's "enormous growth potential."
Image source: Getty Images.
3. Expanding Baidu as a platform
Baidu controls about 70% of China's online search market, according to StatCounter. However, it still faces disruptive competition from Tencent, which expanded WeChat -- the most popular mobile messaging app in China with 1.08 billion monthly active users (MAUs) -- into a walled ecosystem of "mini programs" for search, shopping, games, and other services. Alibaba's Shemna, which controls over 20% of the mobile search market, also threatens to pull Baidu's users into Alibaba's sprawling ecosystem.
That's why Li declared that it was "high time that Baidu stepped forward as a platform company." This means Baidu plans to increase its mobile presence, lock users into its digital ecosystem, and expand beyond PC and phones into adjacent markets.
We already saw some these efforts pay off last year. Baidu stated that its daily active users (DAUs) on the Baidu App grew 19% annually to 151 million last September, and over 100 million of the app's MAUs used its "Smart Mini Programs" -- which mimic Tencent' Mini Programs for WeChat. Its paid subscribers on iQiyi, the video platform it spun off last year, also hit 80.7 million -- representing a sequential gain of 13.5 million subscribers. It even launched a blockchain platform, which could tether enterprise customers more tightly to its platforms.
All those efforts, along with the growth of DuerOS and Apollo, could help Baidu leverage its lead in the online search market to hold Tencent and Alibaba at bay.
4. Winter is coming
However, Li still warned that the economic slowdown in China was "as cold and real as winter" for Baidu and other tech companies. That statement isn't surprising, since China is experiencing its slowest growth in decades, tougher government regulations are curbing the expansion of many Chinese tech companies (especially in the internet and video-game industries), and the ongoing trade war with the U.S. is exacerbating the pain.
Despite those challenges, Li noted that the slowdown gave Baidu a chance to streamline its business by cutting costs, improving its operational efficiency, and expanding into higher-growth markets. Citing an ancient Chinese proverb, Li stated that "only when the year grows cold do we see the qualities of the pine and the cypress."
The key takeaways
I own shares of Baidu, and I don't plan to sell my position anytime soon. Baidu certainly faces near-term challenges in China, but it remains the 800-pound gorilla in China's online advertising market, and its expanding ecosystem could create new growth engines for the company.
More From The Motley Fool
- 10 Best Stocks to Buy Today
- 3 Stocks That Are Absurdly Cheap Right Now
- 5 Warren Buffett Principles to Remember in a Volatile Stock Market
- The $16,728 Social Security Bonus You Cannot Afford to Miss
- The Must-Read Trump Quote on Social Security
- 10 Reasons Why I'm Selling All of My Apple Stock