Baidu (BIDU -1.03%), the Chinese tech giant that owns the country's top search engine, recently posted first-quarter numbers that topped analysts' expectations. Its revenue rose 25% year over year to 28.1 billion yuan ($4.3 billion), beating estimates by 980 million yuan.
Its adjusted net income increased 39% to 4.3 billion yuan ($656 million), or 12.38 yuan per ADS -- which beat expectations by 1.63 yuan. Its adjusted EBITDA more than doubled to 5.9 billion yuan ($901 million).
Baidu expects its revenue to rise 14%-25% year over year in the second quarter. That forecast doesn't include any potential gains from its planned purchase of JOYY's live streaming platform, YY Live.
These numbers suggest that brighter days are ahead for Baidu after two years of sluggish growth. But is it worth buying right now as the market rotates from growth to value stocks?
Has Baidu fixed its biggest problem?
Baidu generated 64% of its revenue from its online marketing business during the quarter. The segment's revenue rose 27% year over year, breaking its seven-quarter streak of consecutive declines.
Over those two years, the online marketing business -- which generates most of its revenue from ads and managed business pages -- struggled with the economic slowdown in China, competition from other ad platforms, and the pandemic's impact on certain sectors.
Baidu's search engine also faced fierce competition from newer platforms like Tencent's (TCEHY -1.79%) WeChat and ByteDance's Douyin (known as TikTok overseas), which both added internal search engines to their apps.
The online marketing business faced an easy comparison to its 19% year-over-year revenue decline during the pandemic a year ago. But the expansion of its mobile app, the growth of its managed pages, and the growing adoption of its Marketing Cloud -- which provides companies a suite of cloud-based advertising tools -- strengthened the business and reduced its dependence on traditional ads.
During the quarter, Baidu generated 35% of its core online marketing revenue from its managed page business, which maintains its clients' business websites, compared to just 21% a year earlier. About 80% of its advertisers are also now locked into its Marketing Cloud, while its CPM (the amount an advertiser pays for 1,000 views) rose by double-digit percentages.
Those improvements, along with Baidu's strong guidance for the second quarter, indicate its advertising business is making a comeback. It also suggests that more companies are building their online presences with Baidu's managed page and marketing cloud services, which makes it more of a one-stop-shop for digitizing a business than a traditional search-based advertiser.
A long-term expansion beyond ads
During the conference call, Baidu CEO Robin Li claimed the growth of the company's "non-advertising revenue could possibly exceed advertising revenue within Baidu Core in the next three years."
That's a bold claim since Baidu's non-marketing revenue only accounted for 15% of its top line during the first quarter. However, that revenue rose 70% year over year to 4.2 billion yuan ($646 million).
Most of that revenue came from Baidu's AI Cloud, which grew its top line 55% year over year to 2.8 billion yuan ($440 million). That growth is impressive, but Canalys estimates Baidu only controls about 8% of China's cloud platform market -- putting it in fourth place behind Alibaba (BABA -1.86%), Huawei, and Tencent. It's also likely unprofitable since even Alibaba can't squeeze out GAAP profits from its cloud platform yet.
Nonetheless, Baidu's AI Cloud also serves as a firm foundation for its other cloud-based services, including its Apollo software platform, robotaxis, electric vehicles, and digital mapping services. Baidu said its revenue from its Intelligent Driving and OGI (other growth initiatives) division "grew rapidly" as its fledgling Apollo Self Driving platform expanded fivefold from a year ago.
All these moves complement the expansion of Baidu's ecosystem, which also includes its mobile app's Smart Mini Programs, its DuerOS voice assistant, its BJH platform for content creators, and its upcoming takeover of YY Live's streaming videos.
If Baidu's revenue from these newer businesses eventually exceeds its advertising revenue, it could be better insulated from economic downturns and compete more effectively against Tencent and Alibaba.
iQiyi remains a weak link
Lastly, iQiyi (IQ 0.26%), the video platform Baidu still owns a majority stake in, stabilized after several quarters of weak growth. Its revenue rose 4% year over year to 8.0 billion yuan ($1.2 billion), or 28% of Baidu's top line, but it remains deeply unprofitable.
Baidu reportedly tried to sell iQiyi to Tencent and Alibaba last year, but those talks fizzled out after the Chinese government started to scrutinize the country's top tech companies. Selling iQiyi would still streamline Baidu's business, but that deal probably won't happen anytime soon.
The bottom line
Analysts expect Baidu's revenue and earnings to grow 20% and 3%, respectively, this year. Its advertising business will likely keep growing throughout the year, but higher investments and a growing dependence on lower-margin businesses could weigh down its earnings.
That outlook seems mixed, but Baidu's stock is still incredibly cheap at 15 times forward earnings. That low valuation makes it a worthy investment, especially if it continues to monetize its cloud, AI, and driverless businesses.