What to Expect From Baidu, Inc. in 2018

2018 will be a busy and transformative year for the "Google of China."

Leo Sun
Leo Sun
Dec 8, 2017 at 10:31AM
Technology and Telecom

Baidu (NASDAQ:BIDU) is often called the "Google of China" since it controls about 80% of the country's online search market. But its expanding ecosystem also includes various portal sites, cloud services, online-to-offline services, and next-generation platforms for artificial intelligence and connected cars. To better understand where Baidu is headed next year, we should take a closer look at its plans for the future.

More focused O2O investments

Baidu's biggest rival in China is Tencent (NASDAQOTH:TCEHY), which owns WeChat, the most popular messaging app in China. Over the past few years, Tencent has expanded WeChat into a monolithic "super app" for mobile payments, ride hailing, food deliveries, and other services. The growth of that ecosystem could reduce users' dependence on Baidu's search services.

Baidu's mobile app.

Baidu's mobile app. Image source: iTunes.

To counter Tencent, Baidu invested heavily in similar online-to-offline (O2O) features for its mobile app, including mobile payments and ride hailing services. It dabbled in food delivery as well, but it recently sold that unit (Xiaodu) to focus on more promising services. Looking ahead, investors should expect Baidu to further streamline its O2O platform.

More investments in AI and driverless cars

Baidu is also investing heavily in AI to process all the information it accumulates into actionable data. Those efforts produced DuerOS, an Alexa-like virtual assistant platform, and Apollo, an open source platform for autonomous cars.

Baidu claims that it's working with 130 companies to integrate DuerOS into smartphones, smart TV, smartwatches, and home appliances. That number should rise next year as the Internet of Things market expands.

A visual representation of the Internet of Things.

Image source: Getty Images.

Apollo has already attracted over 70 partners worldwide. To complement those partnerships, Baidu launched the 10 billion yuan ($1.5 billion) Apollo Fund to invest in 100 autonomous driving projects over the next three years, and is currently testing its own driverless cars in China.

A major partner in both these efforts is NVIDIA (NASDAQ:NVDA), which provides the Drive PX autonomous driving platform for Baidu's cars and Volta GPUs for its cloud data centers. NVIDIA has also installed DuerOS in its Shield devices, and is helping optimize Baidu's PaddlePaddle open source deep learning framework for NVIDIA Volta for researchers and academic institutions.

Expanding into the wobbly fintech market

Baidu, Tencent, and other Chinese tech giants are all investing heavily in the financial technology market. Baidu launched its Financial Services Group (FSG) a year ago.

The FSG unit sells wealth management products, loans, and offers an online-only banking to customers. Those services are integrated into its mobile payment platform Baidu Wallet, which had 100 million activated accounts at the end of 2016 -- an 88% jump from 2015.

A robot hand touches a trading screen.

Image source: Getty Images.

To expand that business, Baidu invested in ZestFinance, a U.S. fintech company that uses big data for credit scores, in two funding rounds. Last quarter, Baidu said that the FSG unit was "making impressive progress leveraging Baidu AI and big data to assess credit risks" for customizing financial products for users.

The fintech market sounds like an exciting growth opportunity, but it's also a risky one. Chinese regulators recently passed stricter restrictions on fintech companies and online lenders to curb predatory lending and fraud, while Moody's and Fitch both warned of credit risks across China's fintech market.

The future of iQiyi

Baidu owns iQiyi, the largest streaming video platform in China. It reaches 78 million daily active users (DAUs) on PCs and 160 million DAUs on mobile devices, according to iResearch, but it remains unprofitable. However, JP Morgan believes that China's entire online video sector could finally break even by 2019, as users pay up for original content.

That's why Baidu is reportedly mulling a spinoff and IPO for iQiyi as early as next year. Reuters claims that the listing could value iQiyi between $8 billion to $10 billion. If that IPO occurs, Baidu would likely retain a controlling stake and its investors would receive shares of the new company. Baidu would also receive a nice infusion of cash for future investments.

The bottom line

Analysts expect Baidu's revenue to rise 23% next year but for earnings to grow just 4% on higher ecosystem investments. However, that spending will reinforce Baidu's reputation as the 800-pound gorilla in online search while widening its moat against rivals like Tencent.

The bears will likely express concerns about Baidu's expenses, competition from Tencent, and tighter government regulations on Chinese tech companies. But I believe that Baidu is still a solid long-term investment that is well poised to profit from the growth of China's digital middle class.