There are lots of reasons to invest in Baidu (NASDAQ:BIDU), the company that's referred to as the Google of China. The comparison is understandable, as the company has taken a lot of cues from Alphabet, like its foray into artificial intelligence (AI), for example.
It isn't unusual for analysts to raise or lower their price targets, or make changes to their estimates for a company's revenues and earnings ahead of a quarterly report, signaling their bullish or bearish feelings to investors. Baidu is expected to release its second-quarter financial report later this month, and a couple of analysts have expressed enthusiasm for the company ahead of that announcement.
Let's take a look at their reasoning and see if investors should agree with their assessments.
Feeding its search growth
Credit Suisse analyst Thomas Chong initiated coverage on Baidu with a price target of $290 and an outperform rating (the equivalent of a buy). In a note to clients, he wrote, "As one of the super apps in China with an increasing user base, Baidu differentiates from its peers with a two-pronged strategy in search [plus] news feeds."
Chong is particularly enthusiastic about the platform's user engagement, noting, "We believe news feeds users are more engaged with time spent being double that of search." He believes this bodes well for the company's opportunity to increase the ad revenue produced by the news feed, as well as continuing to find new and innovative ways to monetize its search results. "We view Baidu's search [plus] feeds is a unique ad model offered to customers, which is highly effective with increased spending for key accounts." He went on to note that analysts' consensus estimates might be too low and may not reflect "the latest business developments."
An AI ad-vantage
Chong isn't the only one bullish on Baidu. Hans Chung of KeyBanc Capital Markets upgraded the company to overweight from sector weight (the equivalent of increasing to buy from hold), with a price target of $305. While Chong also likes Baidu's opportunities in search and news feed, he believes that AI is the company's secret weapon -- one that gives it a significant advantage. In a note to clients, he outlined the benefits of the Phoenix Nest AI marketing platform this way: "The new system could better match ads to users through targeting capabilities on a real-time basis and self-improved manner, which drive incremental ad inventory without increasing ad loads."
One of the key benefits that AI systems bring to bear is that the more they are used, the better they become at what they do -- in this case, making Baidu's advertising more effective. Chong sees the company's AI tech as a catalyst "for long-term growth given the early stage of business and market development."
He also believes that revenue from news feed could increase significantly. "According to checks from our field work, we see a stronger ramp in news feed ad revenue driven by higher user engagement with daily active users of 150 million as of June and 30% year-over-year growth of total time spent in the second quarter of 2018."
Improving long-term prospects
Baidu's recovery began in earnest last year after a period when the company struggled to adapt to stricter regulations imposed by the Chinese government on internet advertising. The company has sold off a number of its non-core businesses and increased its focus on mobile search and AI. This heavier emphasis on the areas where it has the strongest potential for growth is something the company has been working on for some time, and its recent results indicate it's paying off.
For the first quarter, Baidu reported that its revenue grew 31% year over year, topping the high end of the company's forecast and blowing past analysts' consensus estimate. Adjusted earnings per share were even more impressive, soaring 133% compared to the prior-year quarter, also above expectations.
I think this shows that there's more growth to come for Baidu and that these analysts may be on to something.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares) and Baidu. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Baidu. The Motley Fool has a disclosure policy.