Is Baidu Stock A Good Buy Now? Watch The Apollo Go Unit

view original post

Kevin Frayer/Getty Images News

On Saturday night, I was intrigued by reading from the weekly sector summary from Seeking Alpha that NetEase Inc. (NTES), Meta Platforms Inc. (FB), and Baidu Inc. (NASDAQ:BIDU) were the top three gainers last week among large-cap Communications Services stocks ($10 billion market cap or more). Why so? It’s because in my mind Meta Platforms, the operator of Facebook, should be the top gainer by far given the wide coverage of its soaring share price post-results on Thursday.

Turns out, NTES stock led the week’s gainers in the Communications Services sector with an 11% jump. How many readers are aware of this? I didn’t expect it at all. Likewise, while I’m cognizant of the upswing in Chinese stocks last Friday on favorable developments coming out of Beijing and that Baidu announced Thursday it won the first driverless permits in China for autonomous ride-hailing services on public roads (more on this later), I was surprised to see BIDU score a similar share price percentage increase as FB stock (8.4% versus 8.9% respectively).

YCharts

A swallow does not make a summer and a week’s worth of performance says little. Nonetheless, it’s telling that despite the unabated negativity surrounding Chinese stocks with the incessant fear-mongering about the potential delisting of ADRs and the use of the Variable Interest Entity [VIE] structure by the Chinese Internet platform companies listed in the U.S., both NTES and BIDU stocks have outperformed Meta Platforms year-to-date by a large margin.

YCharts

Stretching the comparison to the past year, the share price of NetEase is down by 15% while Baidu declined by 41%, just behind FB stock’s 38% plunge.

YCharts

Given the relative resilience of BIDU stock and the significant milestone for Baidu in its commercial robotaxi rollout, I reckon it’s time to review its fundamentals and outlook. Hopefully, readers are thinking the same and this article will help in your research into the Chinese search engine and artificial intelligence titan.

BIDU Stock Key Metrics

At the last close price of $124.17, BIDU stock is trading at a price-to-earnings ratio (forward basis) of 17.1 times. This is a massive compression in valuation multiples from the highs (above 40 times) established in February 2021.

YCharts

Baidu’s price-to-sales ratio (forward basis) has similarly shrunk from nearly 6 times in February 2021 to the current 2.1 times. This is a recovery from the mere 1.8 times during the March selldown but a far cry from the highs last year.

YCharts

Baidu’s price-to-book value has also compressed dramatically from above 4 times in February 2021 to 1.3 times currently.

YCharts

To provide readers with some tangible measures of the health of Baidu, I compare its financial numbers with that of Uber Technologies Inc. (UBER). The two may seem as different as day and night, but Uber used to pursue autonomous driving while Baidu is a leader in Chinese self-driving technologies.

While Uber’s net financial debt has been rising every quarter since mid-2019 to $5.0 billion, Baidu’s net cash has climbed to $15.2 billion. This represents around 30% of Baidu’s market capitalization, the highest level since March 2020.

YCharts

Uber is a well-known name not just in the U.S. but internationally and it has operations globally. Baidu’s main market and source of revenue are China. Understandably, it is hardly a household name outside of China. Yet, despite the well-publicized regulatory crackdown on the Chinese Internet sector in the past year, Baidu managed to grow its revenue to $19.3 billion, surpassing Uber’s $17.5 billion. Baidu’s net income of $1.6 billion also places it favorably over Uber which reported a trailing-twelve-month net loss of $496 million.

YCharts

Although Baidu has superior financials as demonstrated earlier, Uber has a larger market cap ($61.5 billion) than Baidu ($42.9 billion) and a larger enterprise value ($67.4 billion versus $28.5 billion). In other words, Uber has more than double the EV of Baidu.

YCharts

Furthermore, Wall Street analysts are expecting Uber to take more than three years to reach $1.48 in earnings per share [EPS] which would give it a forward PE of 21.2 times. In other words, even until the end of 2025, Uber would still not arrive at a valuation multiple below Baidu’s current PE.

Seeking Alpha Premium

Even that time frame is contingent on the consensus EPS estimates being on the mark. Looking at the historical data, Uber’s earnings surprise has a mixed track record, though with more negatives than positive ones. Hence, Uber may take longer to narrow that valuation gap.

Seeking Alpha Premium

Baidu’s quant rating is less optimistic at ‘Hold’. Nevertheless, the Factor Grades have indicated improvements in valuation (from C- three months ago to C+ currently), and revisions (from D+ three months ago to C+ currently). Baidu’s growth, profitability, and momentum scores may have deteriorated, but that could change when the company reports the next quarterly results.

Seeking Alpha Premium

How Has Baidu Performed This Year?

In the earlier share price charts, I compared BIDU stock with FB stock. On a YTD basis, Baidu has not only outperformed Meta Platforms; it has fallen less than all the FANG names [Meta Platforms, Amazon.com (AMZN), Netflix (NFLX), and Alphabet (GOOG)(GOOGL)].

Baidu, together with Alibaba Group Holding Limited (BABA) and Tencent Holdings Limited (OTCPK:TCEHY)(OTCPK:TCTZF), are known as the BAT of the Chinese Internet trios. The BAT has outperformed the FANG YTD and BIDU trumped them all.

YCharts

What Is The Target Price For Baidu Stock?

The consensus price target for BIDU stock by Wall Street analysts is currently around $200. When BIDU was trading at around the current levels ($100-$130) in 2019-2020, the price target was around $150.

Seeking Alpha Premium

Thus, we can either conclude analysts have further room to revise their target prices on Baidu downwards or they have higher confidence of BIDU recovering in the next twelve months. The “Strong Buy” rating analysts have accorded BIDU suggests the latter. BIDU has a score of 4.50, below what U.S. tech giants GOOG and AMZN (4.73 and 4.63 respectively) received, but higher than FB’s 4.33 and NFLX’s 3.45.

Seeking Alpha Premium

It’s hard to believe analysts are becoming bearish on Baidu when the consensus score has risen from sub-4.0 in mid-2019 and is on an uptrend through 2020-2021 amid the regulatory crackdowns on the internet sector. Apart from GOOG, the rest of the tickers compared in the above chart have seen a lowering in rating scores since the beginning of this year.

Is BIDU Stock A Buy, Sell, or Hold?

Last Friday, China’s top policy body, the 25-member Politburo headed by President Xi Jinping, issued a statement on policy support for the economy. Market players went wild, excited about the prospect that Beijing has reversed its strong stance on “fixing” the internet sector and is ready to do whatever it takes to boost the economy.

This is a good thing for Chinese stocks including Baidu. However, it distracted from the more pertinent development as mentioned in the introduction – that Baidu clinched the first-ever permits in China authorizing the company to provide driverless ride-hailing services to the public on open roads in Beijing.

Baidu

Baidu attributed the success in securing this regulatory permission to “its strong foundation in AI and its leading test-drive mileage.” Baidu accumulated over 27 million kilometers (16 million miles) of road testing in the past nine years with zero traffic accidents, including mileage recorded by driverless test cars in multiple cities across China as well as in California, U.S.A.

The revenue contribution from this development is likely to be minimal, with only ten autonomous vehicles without drivers behind the steering wheel offering rides to passengers in a designated area of 60 square kilometers in Beijing. Furthermore, users will only be able to hail a driverless ride using the Apollo Go mobile app from 10:00 to 16:00, a mere six hours in the day.

Baidu has plans to add 30 more such vehicles at a later stage, but even if this is achieved this year, the expected revenue is still going to be a drop in the bucket. Nevertheless, this is a good start and the government may allow an expansion of the scheme throughout China if Beijing’s rollout proves successful.

Furthermore, Baidu could be looking at the permit win as a marketing tool for its Apollo Go autonomous services which secured 213,000 orders in Q4 2021, making it the global leader by order volume.

Analysts likely have not factored in the announcement on Friday in their projections. Even then, the consensus EPS estimates are showing a strong recovery in 2023 with a 30% jump following a 14% drop in 2022. By 2024, the PE would compress to a low of 11 times.

Seeking Alpha Premium

Investing in Chinese stocks is always fraught with risks. However, Baidu’s autonomous ride-hailing advancement seems to fall well within what Beijing desires – to be a high-tech nation leveraging its widely deployed 5G network for smooth traffic management.

If driverless robotaxis are the future as Cathie Wood envisaged, BIDU stock looks like a better bet than UBER. Baidu is profitable, trading at a low PE ratio, and after a year to forget (2022), analysts are projecting healthy EPS growth from 2023.

The broader stock market is looking weak and the adage “sell in May and go away” could dampen investor sentiment. Otherwise, Baidu stock is a good buy now, with the Apollo Go division potentially on the cusp of significant revenue contribution.