Chinese search engine behemoth Baidu’s stock (NASDAQ: BIDU) stock has been a laggard over the past year, declining by about 20% since the start of 2024. A couple of trends have impacted the stock. Firstly, China’s post-Covid-19 economic rebound has been weaker than expected. The real estate crisis has driven down home prices, eroding household wealth and consumer confidence, while youth unemployment remains high. These factors have weighed on domestic consumption impacting Baidu’s core search business. As businesses cut marketing budgets, ad sales on Baidu’s search platforms have slowed, particularly in key categories such as e-commerce, real estate, and travel. In Q3 2024, Baidu’s revenue fell by 3% year-over-year to $4.78 billion, while adjusted earnings declined by around 19% to $2.37 per share.
There are also concerns about the impact of AI on Baidu’s search operations. While Baidu has been investing considerably in AI with tools such as its Ernie chatbot, it may have to figure out competent monetization strategies, since the technology deployed at the moment has less scope for advertisements. Moreover, AI-powered chatbots could disrupt traditional search as users seek direct answers rather than clicking through search results and ads. The competition for search could also become more intese, as Chinese tech players such as Alibaba and Tencent are developing competing large language models, which could challenge Baidu’s position in the search market.
Notably, BIDU stock has performed worse than the broader market in each of the last 4 years Returns for the stock were -31% in 2021, -23% in 2022, 4% in 2023, and -29% in 2024. The Trefis High Quality Portfolio, with a collection of 30 stocks, is less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could BIDU face a similar situation as it did in 2021, 2022, 2023, and 2024 and underperform the S&P over the next 12 months – or will it see a recovery?
There are positives for Baidu. The Chinese government appears more committed to economic stimulus measures to revive growth, signaling a shift toward looser monetary policy and more active fiscal spending in recent months. Meanwhile, China’s AI sector has gained momentum, with the latest DeepSeek AI model, which was recently unveiled, surprising the tech world by offering close to ChatGPT levels of performance while claiming to use considerably lower computing power. China’s strong AI capabilities are also likely to draw more interest from investors, following the unveiling of the DeepSeek AI model last month. DeepSeek promises ChatGPT-level performance with a fraction of the cost and computing power. Baidu, with its advancements in AI such as including Ernie Bot and self-driving technology has made considerable progress in the field. As one of the few publicly listed plays on China’s AI sector, Baidu could benefit from higher investments.
At around $90 per share, we see Baidu as fairly valued. The stock trades at roughly 9x consensus 2025 earnings, well below the nearly 40x multiple it commanded during the Covid-19 pandemic. Additionally, Baidu held nearly $21 billion in cash at the end of Q3 2024, with debt of about $9 billion, giving it a net cash position of $12 billion. That’s approximately 40% of its current market cap. Excluding the cash position, Baidu stock trades at just about 6x forward earnings, which is very reasonable. See our analysis of Baidu Revenue and Baidu Valuation for more details on how the company’s revenues are trending and how its valuation compares with peers.
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