Chinese Internet behemoth Baidu’s stock has declined by about 22% year-to-date and also remains down by 65% from its early 2021 highs., trading at levels of around $117 per share currently. There have been multiple headwinds for Baidu in recent months. While China has been cracking down on its big tech companies over the last two years, focusing on data privacy, and antitrust issues, the recent sell-off comes after the U.S. Securities and Exchange Commission recently added the search giant to a provisional watchlist of foreign companies that face delisting if they don’t allow U.S. regulators to review their audit reports for three years. Chinese companies are forbidden from sharing these reports currently. Moreover, Baidu’s core advertising business is also witnessing a slow down due to weaker GDP growth in China and the trend is likely to get worse over Q1 2022, as the country contends with Covid-19 related lockdowns in multiple regions. For perspective, over 2021, the advertising business grew by just about 11%, while actually posting a year-over-year decline in Q4.
However, we think Baidu stock looks like good value post the sell-off. While the impact of the regulatory overhang on Baidu stock is hard to gauge at the moment, Baidu has indicated that it would “strive to maintain its listing status” on U.S. exchanges, while the Chinese government has also hinted that it would take steps to support overseas listings of Chinese equities. Moreover, despite some concerns in the core advertising vertical, Baidu is making solid progress with its AI and cloud businesses. Over the last year, the company’s cloud business, which is its second-largest business segment, grew 64% year over year. Unlike rivals such as Alibaba which offer more generic cloud services, Baidu’s business is apparently more specialized in AI-based applications for specific industry verticals. Baidu is also doubling down on other AI-focused areas such as autonomous driving with its Apollo Go robotaxi service, which operates in multiple cities in China on a commercial basis, charging for rides. This could be an indicator of the progress the company has made on the AI front.
Following the sell-off, Baidu stock trades at just about 15x consensus earnings, and revenues are poised to grow by about 10% this year, per consensus estimates, with growth likely to pick up further in 2023. This is well below the near 40x
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