What happened

Shares of Baidu (BIDU -0.56%) were on fire today, up 13.2% as of 1:50 p.m. ET. While today was a good day for tech stocks generally, Baidu also had the added benefit of a stronger-than-expected earnings report last night.

Given its beaten-down valuation amid massive pessimism surrounding Chinese stocks, it's no wonder shares are surging today.

So what

In the first quarter of 2022, Baidu posted revenue of $4.48 billion, up 1% over the prior year, as well as non-GAAP (adjusted) earnings per share of $1.77. Even though that profit figure was down 9% over the prior-year quarter, it actually beat lowly expectations by a huge $0.94.

While 1% growth certainly doesn't sound very bullish, it was actually much better than expected, considering Baidu's main business is its search engine, which is dependent on advertising. As investors saw in the recent earnings report from Tencent, advertising has been very weak in China, due to the economic slowdown and Shanghai lockdowns in the first quarter. So to see Baidu beat expectations was a breath of fresh air.

However, Baidu did see its advertising revenue decline, down 4% year over year. Still, that was better than some expected, after Tencent posted an 18% decline in its own ad businesses during the first quarter. Perhaps that's because search-based advertising, which is more direct response and closer to an actual purchase, did better than brand advertising on traditional media. Baidu's monthly active users also increased 13% to 632 million, showing increasing adoption, even if advertiser budgets came down.

But the big bright spot for Baidu was its non-online marketing revenue, which includes its artificial intelligence (AI) cloud platform and other AI-powered businesses, such as its self-driving auto platform. Those were up 35% year over year, leading to greater optimism around Baidu's diversification away from online ads and media.

Finally, Baidu is a large shareholder in streaming entertainment platform iQiyi, which saw its revenue decline 9% year over year. Yet even there, perhaps results were better than feared. While subscribers declined year over year, they were actually up sequentially from the fourth quarter.

Person streams video on a smartphone with video screens projected in the air.

Image source: Getty Images.

Now what

After today's surge, Baidu trades around 19.4 times this year's earnings estimates, which is not that expensive. That's especially true considering Baidu's rock-solid balance sheet, with around $29 billion in cash and short-term investments against just roughly $12.5 billion in debt, making its net cash holdings a significant portion of its $48 billion market cap. So the stock is actually much cheaper on an enterprise value basis, probably closer to 14 times this year's earnings estimates.

That could certainly make Baidu a value stock, provided the Chinese economy turns around and the government ends its regulatory campaign against the country's tech leaders. However, Baidu's earnings trajectory is still in question, since its ad-based revenue is cyclical, iQiyi seems to be stagnating, and its AI-based platforms, while growing fast, have uncertain near-term profitability.