Shares of Baidu (BIDU -1.78%) recently rose to a two-year high after the company posted impressive second quarter earnings. The Chinese search giant's revenue surged 14% annually to $3.08 billion, its adjusted EBITDA climbed 41% to $886 million, and its earnings soared 69% to $1.67 per ADS, crushing expectations by $0.16.
That growth was fueled by a recovery in its advertising business, which was previously throttled by a government crackdown on misleading ads, and investments in its O2O (online-to-offline) ecosystem finally paying off. Revenue from its "other services" category, which includes those O2O services, soared 126% and accounted for 14% of its top line.
Baidu's mobile app. Source: iTunes.
Wall Street expects that momentum to continue, with 21% sales growth and 47% earnings growth this year. I'm bullish on Baidu as well, but I believe that investors should also check out three other stocks that will benefit from Baidu's growth -- PayPal (PYPL -0.27%), SINA (SINA), and NVIDIA (NVDA -3.87%).
PayPal
Baidu recently partnered with PayPal to expand its mobile payments platform, Baidu Wallet, into overseas markets. Under the agreement, Baidu Wallet -- which had 100 million activated accounts at the end of 2016 -- will be accepted by roughly 17 million PayPal merchants worldwide.
That move widens Baidu's moat against Tencent and Alibaba, which have both been expanding their mobile payment platforms beyond China. Tencent's WePay has inked multiple partnerships with global payment firms, while Alibaba's affiliate Ant Financial acquired half a dozen payment firms across Asia and recently made a $1.2 billion bid for the U.S. remittance firm MoneyGram.
By allowing its global merchants to accept Baidu Wallet, PayPal will benefit from the spending habits of Chinese tourists. Chinese tourists spent $261 billion abroad last year, representing a 12% jump from 2015, according to the UNWTO World Tourism Barometer.
PayPal's mobile app. Source: Google Play.
SINA
SINA is one of China's largest internet portals and owns a majority voting stake in the popular micro-blogging site Weibo (WB 0.91%). Its network includes dozens of news sites for sports, finance, entertainment, travel, fashion, and other topics, in both desktop and mobile formats.
In 2012, Baidu and SINA agreed to merge parts of their ecosystems. SINA integrated Baidu search into its portal sites, and allowed Baidu to index social content from Weibo. In exchange, Baidu integrated Weibo into its cloud computing services. SINA is also partnered with Alibaba via Weibo (since Alibaba is Weibo's second largest stakeholder), which adds Alibaba's e-commerce and mobile payment features to Weibo.
Today, Baidu, Alibaba and SINA have a common enemy in Tencent, which threatens all three companies with its expansion of WeChat, the biggest mobile messaging app in China. WeChat's 938 million monthly active users and ever-expanding ecosystem of O2O services essentially make it a "mini-OS" which operates within a single iOS or Android app. As a result, we might see fresh partnerships between these three companies to counter Tencent's growth.
NVIDIA
Baidu constantly mentions AI and driverless cars as potential markets for future growth. It founded its Big Data Lab for AI research three years ago, and the unit now improves 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.
Baidu plans to launch its own autonomous cars, which are being produced by a Chinese automaker, by 2018. It's working with TomTom to produce high-detail maps for autonomous cars, and it recently partnered with over 50 companies on Project Apollo -- which aims to create the "Android of the autonomous driving industry" with an open-source, cloud-connected OS.
NVIDIA's Tesla V100 data center GPU. Source: NVIDIA.
Baidu is working closely with chipmaker NVIDIA in both markets. In the AI market, it's using NVIDIA's next-gen Volta GPUs in its Baidu Cloud data centers to accelerate machine learning tasks, and will integrate Duer into NVIDIA's Shield TV set-top boxes. Baidu also plans to adopt NVIDIA's Drive PX platform for autonomous cars.
Baidu's backing in the Chinese market could help NVIDIA retain its first-mover's advantage in both the AI GPU and automotive CPU markets, which would widen its moat against potential challengers like Qualcomm and Intel.
The key takeaways
Investors shouldn't simply buy PayPal, SINA, or NVIDIA based on their partnerships with Baidu. But all three stocks are still solid investments on their own.
PayPal has posted double-digit sales growth ever since it was spun off of eBay in 2015, SINA represents a fundamentally cheaper way to invest in Weibo, and NVIDIA's GPU and CPU businesses are still firing on all cylinders. Therefore, partnering with Baidu is just another reason to consider buying these three stocks.
