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Here's Why The Best Is Yet to Come for Baidu, Inc.

By Leo Sun - Jul 20, 2017 at 11:42AM

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Baidu has been a lackluster stock over the past year, but it’s still a smart long-term buy.

Baidu (BIDU 1.19%) has been a laggard in the Chinese tech industry over the past year due to a government crackdown on its advertising practices, weak sales growth, and the rising costs of countering ecosystem rivals like Tencent (TCEHY 2.04%) and Alibaba (BABA 2.64%).

Over the past 12 months, shares of Baidu rose 16%. That doesn't seem too bad until we consider that Tencent and Alibaba, the other two companies in the "BAT triumvirate," respectively rallied about 60% and 80% during that same period.

Baidu's mobile app.

Baidu's mobile app. Source: iTunes.

But despite underperforming its biggest rivals, I believe that it would be a mistake to give up on Baidu. Let's take a look at four signs that the Chinese search giant's best days could still be ahead.

1. It's still the 800-pound gorilla in China's search market

Baidu controls about 80% of China's search market, which makes it the go-to platform for internet ads. Tencent's WeChat, the most popular messaging app in China, also attracts plenty of advertisers, but there's no indication that those advertisers aren't also advertising on Baidu.

That rivalry is analogous to the competition between Alphabet's Google and Facebook (META -0.48%). Google and Facebook may try to force each other out of the internet advertising market, but Google can't do social, and Facebook can't do search -- so those ecosystem walls will hold.

Baidu's battle with Tencent is more complex, with both companies integrating online-to-offline (O2O) features like mobile payments, ride hailing services, and other services directly into their apps. But the natural ecosystem boundaries remain -- Baidu won't become a social media giant, and Tencent won't dominate internet searches. Therefore, the fears of Tencent "killing" Baidu with new in-app search features are probably overblown. 

2. Its expanding O2O ecosystem

Baidu's main defense against Tencent is the expansion of its O2O ecosystem. Both Baidu's mobile app and Tencent's WeChat are trying to become "super apps" from which multiple services can be launched without leaving the app. It's the same strategy Facebook has adopted with Messenger.

By keeping users corralled within their apps, Baidu and Tencent build revenue-generating and data-gathering ecosystems. Like Google and Facebook, Baidu and Tencent process that data into actionable information for targeted ads, facial recognition features, artificial intelligence, and even driverless cars.

3. Artificial intelligence, smart homes, and driverless cars

To accelerate its AI efforts, Baidu founded its Big Data Lab in July 2014. That division works on its machine learning algorithms, search technologies, and big data applications. It's already launched Duer, a Siri-like virtual assistant, and predictive analytics tools for businesses.

That unit is partnered with NVIDIA (NVDA -0.86%) across multiple AI markets. Baidu recently announced that it will use Nvidia's next-gen Volta GPUs in its Baidu Cloud data centers to accelerate machine learning tasks, that it will use NVIDIA's Drive PX platform for its autonomous cars, and integrate Duer with NVIDIA's Shield TV set-top boxes.

That last investment complements Baidu's recent introduction of the DuerOS for third-party smart speakers -- a push which could counter Alibaba's new smart speaker, the Tmall Genie. That move indicates that Baidu could expand into Chinese smart homes.

Baidu's upcoming driverless cars.

A fleet of Baidu's driverless cars. Source: Baidu.

As for driverless cars, Baidu previously partnered with NVIDIA and HERE Maps to create a cloud-connected mapping platform for autonomous cars. Baidu plans to launch its own autonomous cars, which are being produced by a Chinese automaker, by 2018.

Baidu also recently announced that more than 50 companies, including Microsoft and Ford, had joined its "Project Apollo" driverless car initiative -- which plans to create the "Android of the autonomous driving industry" with its open-source, cloud-connected OS.

4. Mobile payments and fintech

Lastly, Baidu is investing heavily in the high-growth fintech market. That ecosystem already includes wealth management products, loans, and an online-only bank. Most of those services are integrated with its mobile payment platform Baidu Wallet, which had 100 million activated accounts at the end of 2016 -- an 88% jump from 2015.

There are legitimate concerns about Baidu increasing its debt or hurting its credit rating by investing in fintech, but it represents another way to counter Tencent and Alibaba, which are both investing heavily in the same market.

Research firm iResearch claims that about 160 million people in China took out 1.2 trillion yuan ($180 billion) in online loans last year, and that figure will rise at an annual rate of 50% over the next three years.

So should you buy Baidu today?

In a previous article, I declared that Baidu will likely tread water in the near term instead of swimming or sinking. I stand by that assessment, since the market is still waiting to see if Baidu can move past its previous challenges and keep pace with Tencent and Alibaba. But over the long haul, I believe that Baidu is still a solid buy, since it can leverage its dominance of the Chinese search market to expand into plenty of new markets.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Leo Sun owns shares of Baidu, Tencent, and Ford. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Baidu, Facebook, Ford, and Nvidia. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$139.38 (1.19%) $1.64
NVIDIA Corporation Stock Quote
NVIDIA Corporation
NVDA
$179.42 (-0.86%) $-1.55
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$177.49 (-0.48%) $0.85
Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
TCEHY
$39.03 (2.04%) $0.78
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$94.87 (2.64%) $2.44

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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