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What Makes Baidu A “Strong Buy”?

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Baidu (BIDU), which was founded in 2000 as a Chinese search engine has evolved into an artificial intelligence (AI) company that offers a full AI stack including AI chips infrastructure, core AI capabilities, deep learning framework, augmented reality, and an open AI platform.

The company also has a controlling interest in iQIYI, a movie and video streaming website.

Baidu primarily generates revenues through Baidu Core, online marketing revenues, and non-marketing revenues. Baidu Core consists of a mobile ecosystem, AI Cloud, Intelligent Driving, and Other Growth Initiatives (OGI).

The mobile ecosystem is a portfolio of over a dozen apps including Baidu App, Haokan, and Baidu Post, which provides an open platform to aggregate a wide array of third-party content and services using BIDU’s AI.

AI Cloud is a comprehensive suite of cloud services and solutions while OGI includes autonomous driving services and Xiaodu smart devices.

First Quarter Results

In the first quarter, BIDU earned total revenues of $4.29 billion, up 25% year-over-year. The company’s Baidu Core posted revenues of $3.13 billion, an increase of 34% year-over-year while online marketing revenue was $2.48 billion, up 27% year-over-year.

Non-marketing revenue in Q1 was $646 million, up 70% year-over-year, with growth was largely driven by BIDU’s cloud services and solutions. The company reported net income of $3.92 billion, with diluted earnings of $11.26 per ADS.

Following the earnings, Oppenheimer analyst Bo Pei reiterated a Buy and a price target of $355 (86.6% upside potential) on the stock. Pei said in a note to investors, “Meanwhile, large ecommerce, mobile communication, and content platforms have been aggressively competing for consumer attention, weighing on BIDU growth and margins.”

“However, we are now seeing competitive pressure subsiding and BIDU's autonomous driving arm Apollo has shown good potential to tap into this emerging market, causing a potential rerating of the stock,” Pei added.

Second Quarter Outlook

In Q2, BIDU expects revenues of between $4.5 billion and $5 billion, indicating a year-over-year growth rate ranging from 14% to 25%. The company noted in its press release that its second-quarter outlook “does not include potential contribution from an acquisition of YY Live.”

In November last year, BIDU announced the acquisition of YY Live, JOYY Inc.’s live video-based entertainment streaming business in China, for $3.6 billion in an all-cash deal. The acquisition is expected to close in the first half of this year.

Baidu’s Apollo

Apollo is the company’s autonomous driving brand. The company said at its earnings call that Apollo had accumulated 6 million miles “of Level 4 autonomous driving testing miles on the road and over 600 million miles of simulated testing.”

BIDU’s Apollo Go, a robotaxi service, has commercialized its operations and has started charging RMB 30 for rides at Shougang Park in Beijing. In March, Apollo Go started charging a minimum fare for rides in Cangzhou.

Baidu’s Robin Li, Co-Founder, Chairman, and CEO, said at the company’s earnings call, “According to China Insights Consultancy, a market research and consulting firm, the TAM [total addressable market] for Apollo intelligent driving, which includes robotaxi ride-hailing, EVs, and self-driving services for automakers will reach $467 billion, almost nine times the size of our advertising TAM of $53 billion in 2025.” (See Baidu stock analysis on TipRanks)

BIDU stated at its earnings call that around ten domestic and international automakers “have signed up with Apollo to install ASD [Apollo Self Driving] in the new vehicles.”

AI Cloud Business

BIDU’s AI Cloud business offers a comprehensive set of solutions including AI platform-as-a-service (PaaS), software-as-a-service (SaaS), and infrastructure-as-a-service (IaaS) solutions. However, the company is currently focusing on its AI PaaS services in order to differentiate its services from the market.

Baidu stated at the Q1 earnings call, “We are seeing the implementation of our AI PaaS drawing repeat purchases. And over the long run, we expect our AI powered business to have higher margin as we build on our PaaS and SaaS business compared to pure IaaS players.”

Looking at the company’s increasing focus on the AI business, analyst Bo Pei commented, “Specifically, Cloud +55% y/y in 1Q, and is expected to accelerate in 2Q and '21. While the rapid growth of AI businesses will likely weigh on Core margin in the NT [near term], we are positive and believe it is justified by meaningfully larger TAM and revenue upside.”

Consensus among analysts on Wall Street is a Strong Buy based on 16 Buys and 3 Holds. The BIDU average analyst price target of $308.13 implies approximately 62% upside potential to current levels.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.