Please ensure Javascript is enabled for purposes of website accessibility

Could Baidu Be a Millionaire Maker Stock?

By Leo Sun – May 29, 2020 at 9:26AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

China’s top search engine faces a growing list of challenges in a changing market.

Baidu (BIDU 3.20%), the Chinese tech giant that owns the country's top search engine, went public 15 years ago. Investors in its IPO are sitting on a near-40 bagger return, but the stock has been cut in half over the past two years.

Baidu remains a battleground stock for the bulls and bears. The bulls believe Baidu's dominance of China's search market, the growth of its streaming video unit iQiyi (IQ 9.09%), and the expansion of its ecosystem will support its long-term growth.

The bears believe intense competition from rivals like Tencent (TCEHY 4.47%), ByteDance, and Alibaba (BABA 4.55%) in the advertising market, the slowdown in the Chinese economy, the trade war, and other macro headwinds will curb Baidu's growth. So can Baidu prove the bears wrong and generate more millionaire-making returns?

A woman uses a search engine on a smartphone.

Image source: Getty Images.

Baidu's core strengths

Baidu controls nearly two-thirds of China's online search market, according to StatCounter. It's the country's third-largest online ad platform after Alibaba and ByteDance, according to research firm R3.

Baidu's DuerOS virtual assistant, which powers its smart speakers and other devices, grew its voice queries nearly three-fold annually to 6.5 billion in March.

Daily active users on its mobile app also rose 28% to 222 million, as monthly active users of its Smart Mini Programs -- which compete against Tencent's WeChat Mini Programs -- nearly doubled to 354 million.

The growth of those platforms indicates Baidu's core search engine is still expanding beyond PCs, and won't be rendered obsolete anytime soon. But that's not all: iQiyi is still one of China's top streaming video platforms alongside Tencent Video, its Apollo driverless platform has over 100 partners, and it continues to expand its AI and cloud platforms.

Baidu's soft spots

Baidu's ecosystem is impressive, but its core business is stalling out. Its ad revenue, which accounted for 63% of its top line, fell 19% annually last quarter -- marking its fourth straight quarter of declines.

It attributed that slowdown to macro headwinds like slower ad spending and the COVID-19 crisis, but it was jarring since smaller players like Tencent and Bilibili (BILI 9.04%) both generated accelerating double-digit ad revenue growth in their latest quarters.

A smart speaker with a couple in the background.

Image source: Getty Images.

Tencent and Bilibili both saw ad spending from the online education, gaming, and e-commerce markets accelerate as lockdown measures kept more people home. But those clients apparently bought fewer ads on Baidu, indicating it's losing relevance in a market fragmented among messaging apps like Tencent's WeChat, Gen Z-oriented digital content platforms like Bilibili, and ByteDance's TikTok.

Baidu's growing dependence on iQiyi's revenue is also troubling. iQiyi's revenue rose 9% annually and accounted for 35% of Baidu's top line last quarter, but its growth is slowing and it remains deeply unprofitable -- which weighs down its total margins.

These challenges won't wane for the foreseeable future, regardless of how aggressively Baidu expands its voice, Mini Program, and AI ecosystems.

Other troubling headwinds

Baidu's investors could also be tripped up by two recent developments. First, iQiyi faces allegations of fraud from prolific short sellers Wolfpack Research and Muddy Waters. The firms claim iQiyi inflated its viewer and revenue numbers, and that Baidu was complicit in its fraud.

Second, the U.S. Senate recently passed a bill that could force Chinese stocks to delist their shares in the U.S. if they don't open their books to U.S. auditors. Reuters recently claimed Baidu could voluntarily delist its shares and relist them closer to home, but CEO Robin Li denied those rumors.

These unpredictable headwinds, combined with Baidu's other challenges, attracted more bears and bulls to the stock in recent years. Li's ominous warnings about Baidu's future -- including a dire proclamation that "winter is coming" as China's economy slows down -- makes it even tougher to buy the stock.

The risks outweigh the rewards ... for now

I personally own shares of Baidu, but it's a much weaker investment than Alibaba and Tencent right now. Alibaba's core commerce and cloud businesses are firing on all cylinders, while Tencent's gaming, advertising, fintech, and cloud businesses are still going strong.

Baidu is struggling to turn around a stagnant advertising business and reduce its dependence on an unprofitable video platform while expanding its ecosystem. That's a messy combination that could curb its growth for years to come -- so investors seeking millionaire-making returns should look elsewhere for now.

 

Leo Sun owns shares of Baidu and Tencent Holdings. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Baidu, Bilibili, and Tencent Holdings. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$123.30 (3.20%) $3.82
Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
TCEHY
$35.31 (4.47%) $1.51
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$84.11 (4.55%) $3.66
Bilibili Stock Quote
Bilibili
BILI
$17.00 (9.04%) $1.41
iQIYI, Inc. Stock Quote
iQIYI, Inc.
IQ
$2.88 (9.09%) $0.24

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
331%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.