What happened
Shares of Chinese search and artificial intelligence (AI) giant Baidu (BIDU +0.29%) roared 41.8% in November, according to data from S&P Global Market Intelligence.
Many Chinese stocks had an awfully good November, even as the country erupted in anti-zero-COVID protests. Paradoxically, that very unrest caused investors to anticipate an easing of the strict lockdowns that had plagued the country since last March when Chinese authorities sought to restrict movement across major cities to avoid the spread of the more contagious omicron variant.
On top of the anticipated reopening, Baidu also reported third-quarter earnings, beating expectations for both revenue and earnings per share.
NASDAQ: BIDU
Key Data Points
So what
While China's economy has gone into a big slowdown, many Chinese tech firms have done a good job of culling costs and boosting profitability, even with lower levels of revenue growth. Baidu was a clear example of this in the third quarter. Although its top-line revenue grew only 2%, its non-generally accepted counting principles (adjusted) earnings per American depositary shares (ADS) increased by 15% as margins expanded. That came in ahead of expectations.
Baidu's mature search business fell 2% year over year but improved by 10% quarter on quarter, which was encouraging. Moreover, Baidu's AI-focused businesses, including its cloud platform and intelligent driving applications, grew 25%, showing strong traction despite a weak economy.
Baidu also owns the streaming service iQIYI (IQ 4.32%), which posted better-than-expected revenues even though they decreased 2% year on year, and subscribers grew quarter on quarter.
In addition to the solid results, Baidu benefited from the anticipation of a lifting of lockdowns after protests spread across China in November. Initially, the unrest that erupted in the middle of the month prompted a sell-off. However, it also spurred a push for more vaccinations for the vulnerable elderly population and several statements from top Chinese officials pointing toward a relaxation, or at least a more targeted implementation, of the strict zero-COVID policies.
Given that virtually all Chinese stocks had already sold off hard this year, optimism for a reopening fueled large percentage gains off the beaten-down lows.
Now what
Even now, Chinese tech stocks could be interesting bets. They have endured a two-year drubbing, including the regulatory crackdown beginning in late 2020, economic weakness following last summer's property bubble bursting, and the disruptive COVID lockdowns that began in March of this year. After the torrent of headwinds, even tech leaders like Baidu trade at very low valuations. For its part, Baidu trades at just 12 times next year's earnings estimates.
However, investors should be aware that the Chinese Communist Party's actions have been somewhat unpredictable over the past few years, and the powerful government remains a huge risk overhanging any Chinese stock, both on the regulatory and the geopolitical fronts. Thus, those looking to bargain-hunt should make sure they keep their allocations to Chinese tech stocks at a level they can afford to lose.
