Is Baidu Stock A Buy After Earnings? Focus On Cloud Business And Valuations (NASDAQ:BIDU)

Elevator Pitch

I have a Buy investment rating assigned to Baidu, Inc.’s (NASDAQ:BIDU) shares. BIDU’s recent quarterly earnings indicate that the company is managing costs well and its AI (Artificial Intelligence) Cloud continues to achieve strong growth. Considering its current appealing valuations and the Wall Street’s bullish price targets, I rate Baidu as a Buy.

When Did Baidu Announce Earnings?

Baidu refers to itself as “a leading AI (Artificial Intelligence) company with a strong Internet foundation” with its “flagship product, Baidu App, which is the No. 1 search-plus-feed app in China” on the company’s website. BIDU’s various businesses are described in greater detail in the chart below.

An Overview Of Baidu’s Business Operations

On Thursday, May 26, 2022 prior to trading hours, Baidu announced its earnings for the first quarter of the current year. The market responded favorably to BIDU’s Q1 2022 financial results release, as Baidu’s shares surged by +14% from $119.32 as of May 25, 2022 to close at $136.19 on May 26, 2022. BIDU’s stock price increased by an additional +2% to conclude the May 27, 2022 trading day at $139.09. In other words, Baidu’s share price rose by a cumulative +16% in the past two trading days post-earnings announcement.

For the remainder of this article, I will focus on the reasons for BIDU’s excellent share price performance post-results announcement and also discuss Baidu’s future business and stock price outlook.

Did Baidu Beat Earnings?

Baidu impressed investors with a massive earnings beat for the first quarter of 2022. BIDU’s Q1 2022 non-GAAP adjusted diluted earnings per American Depositary Share (ADS) of $1.77 was +113% above the sell-side analysts’ consensus bottom line projection of approximately $0.83.

Specifically, Baidu’s earnings beat was driven by lower-than-expected expenses as per financial data disclosed in the company’s Q1 2022 financial results press release. In absolute terms, BIDU’s total costs decreased by -17% QoQ from RMB31.1 billion in the fourth quarter of 2021 to RMB25.8 billion in the recent quarter, and its Q1 2022 total expenses were only slightly higher (+2%) on a YoY basis. In percentage terms, Baidu’s total costs as a proportion of revenue declined from 94% in Q4 2021 to 91% in Q1 2022.

In addition, iQIYI (IQ), BIDU’s streaming business, turned around from net losses attributable to Baidu of -RMB1.3 billion for Q1 2021 and -RMB1.8 billion for Q4 2021 to generate a positive profit contribution of +RMB169 million in the recent quarter according to its Q1 2022 6-K filing.

In summary, decent cost control and a turnaround for iQIYI in terms of profitability were responsible for Baidu’s better-than-expected bottom line for the first quarter of this year.

BIDU Stock Key Metrics

Apart from focusing on the headline earnings beat, there are also two other key metrics for BIDU that are worth highlighting, as they have implications for Baidu’s short-term and long-term outlook.

The first key metric is online marketing revenue. Baidu’s online marketing revenue declined by -4% YoY to RMB15.7 billion as per the company’s Q1 2022 earnings press release.

As a comparison, BIDU’s online marketing revenue increased by +1% YoY to RMB19.1 billion in the final quarter of 2021. The contraction in online marketing revenue for Baidu in the most recent quarter could be a sign of further weakness for the rest of the year.

The second key metric is non-advertising revenue. Baidu continues to make good progress in reducing its reliance on advertising revenue which is relatively more economically sensitive and cyclical.

As revealed at the company’s recent Q1 2022 results briefing, BIDU’s non-advertising revenue as a percentage of total revenue for Baidu Core (core businesses apart from iQIYI) expanded from 21% in Q1 2021 to 27% in Q1 2022. The company’s non-advertising revenue grew by +35% YoY to RMB5.7 billion in the first quarter of 2022; Baidu AI Cloud was a key driver as this sub-segment’s revenue jumped by +45% during the same period.

In the subsequent sections of this article, I touch on Baidu’s short-term financial expectations, long-term business outlook, and valuations.

What To Expect After Earnings

Investors shouldn’t expect Baidu to do well in the near-term following the recent release of its Q1 2022 financial results.

According to S&P Capital IQ’s consensus financial data, Baidu is expected to deliver revenue of RMB29.8 billion in the second quarter of 2022 which would be equivalent to a -5.1% YoY decrease in its top line. Furthermore, sell-side analysts see BIDU’s normalized net profit decreasing by -25.0% YoY to RMB4.0 billion in Q2 2022.

The weak outlook for BIDU’s financial performance in the upcoming quarter is mainly attributable to economic weakness in China brought about by the pandemic which should have a negative impact on its future marketing revenue for the foreseeable future. Notably, Baidu highlighted at the company’s recent quarterly earnings call that Q2 “will be more challenging for us” and acknowledged that the company has “relatively limited visibility for” 2H 2022 “which should largely depend on how the pandemic develops.”

Is Baidu A Good Investment Long-Term?

Baidu’s attractiveness as a good investment in the long-term is largely dependent on the headway that the company is making in the area of AI Cloud. As noted in an earlier section of this article, Baidu AI Cloud delivered an impressive +45% sales growth in the most recent quarter.

A recent change in BIDU’s management team is worth paying attention to, and this might offer indications of Baidu’s strategic priorities. Based on a May 5, 2022 article published on Chinese technology news website Pandaily, Dou Shen was appointed as “the head of the firm’s (Baidu) AI Cloud Group” and will “be responsible for leading the ACG team, speeding up the integration of cloud and artificial intelligence.” The TechNode website also stressed in a separate article written in early-May that the recent appointment of Dou Shen “is a sign that the company sees the sector (Baidu AI Cloud) as an important vertical.”

According to its corporate website, Dou Shen has worked at Baidu for around a decade, and he has had prior experience being employed with Microsoft (MSFT) and also as a co-founder of another tech company (Buzzlabs).

More importantly, the cloud market in China is growing fast and Baidu is gaining market share at the expense of rivals. Based on research done by Canalys, the cloud infrastructure services market in China is forecasted to grow by a +25% CAGR from $27.4 billion in 2021 to $84.7 billion in 2026. The China cloud market is dominated by four major players, Baidu AI Cloud, Alibaba (BABA) Cloud, Tencent (OTCPK:TCEHY) (OTCPK:TCTZF) Cloud, and Huawei Cloud, which boasted a combined market share of 80% last year as per Canalys research.

A December 13, 2021 South China Morning Post news article also noted that Baidu AI Cloud increased its market share in the Chinese cloud market last year, while competitors like Tencent Cloud and Huawei Cloud ceded share over the same period. I expect the recent appointment of Dou Shen to make the Baidu AI Cloud business even more competitive, which bodes well for the company’s long-term growth prospects.

What Is The Target Price For Baidu Stock Now?

Wall Street analysts’ target prices for Baidu present a favorable picture of the stock’s current valuations.

The average price target for BIDU is $200.70, which translates into an upside of +44% for the stock as compared to its last done price of $139.09 as of May 27, 2022. The downside for Baidu’s shares appears to be limited, with the most bearish analyst on the Street thinking that BIDU is worth $126.66 per share which is only a modest -9% below Baidu’s last traded price. Also, if the most bullish analyst covering Baidu’s shares is right, the company’s shares could more than double from current levels to $286.69.

The sell-side analysts’ bullish price targets for Baidu are validated by the stock’s undemanding valuations. As per S&P Capital IQ data, the market values Baidu at 1.8 times consensus forward next twelve months’ Enterprise Value-to-Revenue and 17.4 times consensus forward next twelve months’ normalized P/E. In contrast, BIDU’s 10-year mean consensus forward next twelve months’ normalized P/E and Enterprise Value-to-Revenue multiples were relatively higher at 24.0 times and 4.7 times, respectively.

Is BIDU Stock A Buy, Sell, or Hold?

BIDU stock is a Buy. While the COVID-19 situation and economic environment in China might exert some downside pressure on Baidu’s near-term financial performance, I remain positive on BIDU’s long-term outlook, particularly its AI Cloud business. Furthermore, an analysis of Baidu’s sell-side consensus price targets and historical valuations also lends support to my Bullish views of the stock.