Baidu (BIDU 1.24%) recently posted its fourth-quarter earnings. Revenue rose 6% year over year to 28.9 billion yuan ($4.1 billion), beating analysts' estimates and marking an acceleration from its flat growth in the third quarter.

Its non-GAAP net income rose 95% from the year-ago period to 9.2 billion yuan ($1.3 billion), or 26.54 yuan ($3.81) per ADS -- which topped expectations by $0.36. Those growth rates indicate that Baidu finally turned a corner, but it expects the coronavirus crisis to hurt revenue in the first quarter with the top line declining 5% to 13%.

A woman speaks into her smartphone.

Image source: Getty Images.

That glum forecast indicated that Baidu stock, which was cut in half over the past two years, wouldn't rebound any time soon. However, it arguably makes more sense to buy Baidu than sell it right now for five simple reasons.

1. Sequential growth in advertising revenue

Baidu's online marketing revenue dipped 2% year over year and accounted for 72% of its top line in the fourth quarter. That marked the business's third straight annual decline:

Year-Over-Year Growth

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Online marketing revenue






Data source: Baidu quarterly reports.

But on a sequential basis, Baidu's ad revenue rose 2%, indicating that concerns about a loss of advertisers to Gen Z-oriented platforms like ByteDance's TikTok and Bilibili were overblown. Companies are also still buying ads from Baidu as China's economy grows at its slowest pace in three decades.

Baidu's first-quarter guidance suggests that the coronavirus crisis will cause companies to throttle their ad spending. However, that lull could end later this year as companies get back to work and ramp up their marketing spending again.

2. Improving margins at iQiyi

Once again, Baidu relied heavily on the growth of its video streaming platform, iQiyi (IQ 0.72%), to offset the weakness of its advertising business. iQiyi revenue rose 7% year over year during the quarter and accounted for 26% of Baidu's top line.

Within that total, its higher-margin membership revenue rose 21% annually and offset a 15% decline in its lower-margin advertising revenue. The platform's total number of subscribers grew 22% to 106.9 million in December.

iQiyi remains unprofitable, but its membership revenue growth narrowed the company's operating loss from 3.3 billion yuan to 2.5 billion yuan ($363 million). This indicates that one of Baidu's biggest problems -- its growing dependence on iQiyi's unprofitable business for revenue growth -- is fading.

A man watches streaming videos on a tablet.

Image source: Getty Images.

3. Improving operating margin at Baidu Core

Baidu's dependence on iQiyi had crushed its operating margin. However, Baidu's non-GAAP operating margin expanded from 10% a year ago to 23% during the fourth quarter. Two main factors sparked that expansion.

First, its non-GAAP operating margin at Baidu Core (which excludes iQiyi and other non-core businesses) expanded from 28% to 39%. That improvement was driven by lower traffic acquisition costs -- which indicated that Baidu wasn't spending too much cash to gain search and advertising traffic.

Second, the non-GAAP operating margin at iQiyi improved from negative 47% to negative 34% as it gained more subscribers and controlled its content costs.

4. Widening moat against Tencent

Baidu also continued to expand its mobile ecosystem. Daily active users on its mobile app rose 21% annually to 195 million in December. Monthly active users of the Baidu app's Smart Mini Programs, which compete against Tencent's (TCEHY 1.91%) WeChat Mini Programs, surged 114% to 316 million.

Baidu noted that all six of China's top delivery companies now offer services through its Mini Programs, and it's gradually expanding into government services. That expansion could eventually turn the Baidu app into a viable replacement for WeChat, which currently allows Chinese citizens to pay bills and access various government services from Mini Programs.

Monthly voice queries on Baidu's Alexa-like voice assistant, DuerOS, more than tripled annually to over five billion. Queries on its Xiaodu smart speakers soared sevenfold to 2.3 billion, and the platform now offers over 3,600 skills. The ongoing growth of DuerOS could prevent rivals like WeChat's internal search engine and Sogou from gaining ground in online searches.

5. Historically low valuation

Baidu trades at a historically cheap 16 times forward earnings. That valuation is based on outdated forecasts that don't fully account for the coronavirus outbreak, but Baidu remains cheaper than Tencent, Alibaba, and other Chinese tech stocks.

The bears will argue that Baidu deserves that discount, since its revenue growth is soft and it faces unpredictable headwinds. However, I believe Baidu will still be a major tech player years from now, and that near-term headwinds like COVID-19, China's economic slowdown, and the unresolved trade war will eventually pass.

Baidu's stock won't lift off in the near future, but it remains one of the strongest tech companies in China with flickers of hope appearing on the horizon. Therefore, it makes sense to accumulate shares before its core growth engines fire up again.