Baidu's (BIDU 0.98%) stock rallied 14% on May 26 after the Chinese tech giant posted its first-quarter earnings report. Its revenue rose 1% year over year to 28.41 billion yuan ($4.48 billion), which beat analysts' estimates by $320 million. Its adjusted net income declined 10% to 3.88 billion yuan ($612 million), or $1.77 per American Depository Share (ADS), but still easily surpassed analysts' expectations by $0.94.
Baidu's growth rates were tepid, but investors had already tempered their expectations over the past year as China's tech sector was repeatedly rattled by regulatory and macroeconomic headwinds. Should investors consider Baidu to be a potential turnaround play at these levels?
Image source: Getty Images.
Reviewing Baidu's main challenges
Baidu owns the largest online search engine in China, and its ecosystem links together a sprawling network of portals, apps, and services. It generates most of its revenue from online marketing services, which primarily consist of digital ads and managed business pages.
But in recent years, Chinese internet users started spending more time on Tencent's WeChat, a "super app" that serves nearly 1.3 billion monthly active users, ByteDance's Douyin (known as TikTok overseas), and other newer platforms. They also initiated their product searches on Alibaba's marketplaces or JD.com instead of Baidu's aging search engine.
That market shift throttled the growth of Baidu's online marketing business and forced it to expand its non-online marketing businesses -- especially in the cloud and AI markets -- to offset that decline.
As Baidu executes that costly turnaround strategy, it continues to grapple with the sluggish growth of iQiyi (IQ 5.24%), its lower-margin streaming video affiliate that faces intense competition from Tencent Video and Alibaba's Youku Tudou, and the slowing growth of the Chinese economy.
Is Baidu's turnaround strategy working?
Therefore, Baidu has three near-term goals: to stabilize its online marketing business (by pivoting from traditional ads toward managed business pages), to accelerate the growth of its non-online marketing businesses, and to revive iQiyi's ailing business.
During the first quarter, Baidu generated 55% of its revenue from its online marketing business. It generated 20% of its revenue from its non-online marketing businesses and nearly 26% of its revenue from iQiyi. Here's how those three main businesses fared over the past year:
|
Revenue Growth (YOY) |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
|---|---|---|---|---|---|
|
Online marketing |
27% |
18% |
6% |
1% |
(4%) |
|
Non-online marketing |
70% |
80% |
76% |
63% |
35% |
|
iQiyi |
4% |
3% |
6% |
(1%) |
(9%) |
|
Total |
25% |
20% |
13% |
9% |
1% |
Data source: Baidu. YOY = year over year.
Baidu's online marketing revenue declined in the first quarter as new pandemic-related lockdowns disrupted ad purchases. But during the conference call, CEO Robin Li predicted the ad business would "recuperate once overall economic buoyancy returns" in a post-lockdown market.
Its non-online marketing revenue continued to climb, driven by the 45% year-over-year growth of Baidu's AI Cloud platform (about 70% of the segment's revenue), but still decelerated significantly from its previous quarters. The growth of Baidu AI Cloud was throttled by the new round of COVID-19 lockdowns in China, which started in mid-March, but it continues to grow much faster than Alibaba Cloud, the market leader that generated just 12% year-over-year revenue growth in its latest quarter.
iQiyi continued to struggle as its number of subscribers declined 4% year over year to 101 million, but that decline was partly offset by its 4% year-over-year growth in membership revenue.
Baidu's margins remain broadly stable
Baidu's adjusted operating margin and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin both contracted year over year but expanded sequentially:
|
Period |
Q1 2021 |
Q4 2021 |
Q1 2022 |
|---|---|---|---|
|
Adjusted operating margin |
16% |
13% |
14% |
|
Adjusted EBITDA margin |
21% |
17% |
19% |
Data source: Baidu.
That stabilization was partly driven by a slim operating profit at iQiyi, compared to an operating loss a year earlier, as the affiliate reined in its channel spending and promotion marketing expenses.
Baidu's AI Cloud platform continued to operate at a loss, but Li predicted that its margins would "gradually improve" as it scales up its operations in a post-lockdown market. However, Baidu still only controlled 9% of the Chinese cloud infrastructure market in 2021, according to Canalys, which puts it in a distant fourth place behind Alibaba (37%), Huawei (18%), and Tencent (16%).
A low valuation with a murky outlook
Baidu didn't provide any guidance for the full year, but analysts expect its revenue to only rise 4% as its adjusted EBITDA declines 3%. Based on those expectations, its stock looks fairly cheap at 2.5 times this year's sales and 13 times this year's adjusted EBITDA.
However, Baidu's stock trades at a discount because its future is murky. Its advertising and cloud businesses both rely heavily on a quick end to China's draconian zero-COVID-19 measures, and both businesses still face a lot of competition in their respective markets. Baidu, along with Alibaba and other Chinese tech stocks, also continues to face delisting threats in the U.S.
Baidu's downside might be limited at these levels, but it won't attract any big buyers until it resolves those issues. Investors should stick with more resilient tech stocks to ride out this tough market.
