Where Will Baidu Stock Be in 1 Year?

Baidu's (BIDU -1.78%) stock rose 4% on May 16 after the Chinese tech giant posted its first-quarter report. Its revenue rose 10% year over year to 31.1 billion yuan ($4.5 billion), which beat analysts' estimates by $230 million. Its adjusted net income grew 48% to 5.7 billion yuan ($834 million), or $2.34 per American depositary share, which also topped expectations by $0.50.

Those headline numbers suggest that brighter days might be ahead for Baidu, which had grappled with tough macro and competitive headwinds over the past few years. But does its stock still have room to run? Let's see where this bellwether of the Chinese tech sector might be headed over the next 12 months.

Image source: Getty Images.

Its three main businesses are growing in tandem again

Baidu controls 40% of the search market in China, according to StatCounter. Its closest competitors, the Russian search engine Yandex and Microsoft's Bing, control 22% and 19% of the market, respectively. Sogou, which is integrated into Tencent's (OTC: TCEHY) WeChat, ranks fourth with a 9% share.

During Q1, Baidu generated 53% of its revenues from its online marketing business, which sells ads across its search engine and portal websites. Nearly half of this segment's revenue notably comes from its Managed Pages, which enable businesses to seamlessly set up websites and online stores within Baidu's ecosystem.

iQiyi, the streaming video unit which Baidu retains a majority stake in, accounted for 27% of its Q1 revenues. Baidu's non-online marketing segment, which hosts its cloud platform and artificial intelligence services, brought in nearly 21% of its revenues. Here's how those three core businesses fared over the past year.

Data source: Baidu. YOY = Year-over-year.

Baidu's online marketing revenues fell year over year for four consecutive quarters before returning to growth in Q1. Its growth had been throttled by China's intermittent COVID-19 lockdowns, macroeconomic headwinds, and intense competition from rival search engines and ByteDance's Douyin (known as TikTok overseas).

But in Q1, Baidu's online marketing revenues rose as China ended its draconian COVID lockdowns. Several of its top verticals -- including the travel, healthcare, and local services sectors -- generated stable growth after the Chinese New Year holiday. It also continued to expand its Managed Pages to curb its dependence on traditional ads.

iQiyi also returned to growth over the past two quarters following a post-pandemic slowdown which lasted for four consecutive quarters. Its non-online marketing revenues are also still rising, driven by the growth of Baidu Cloud, even as the macro headwinds forced many companies to rein in their spending on big infrastructure upgrades. However, Baidu Cloud is still a distant underdog in China's cloud infrastructure race, with a 9% market share, according to Canalys. That puts it in fourth place behind Alibaba Cloud (36%), Huawei Cloud (19%), and Tencent Cloud (16%).

Cutting costs to boost its margins

As Baidu's growth cooled, it cut costs to strengthen its adjusted operating and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins. Both margins expanded sequentially and year over year in Q1.

Data source: Baidu.

That expansion was mainly driven by the elimination of Baidu Cloud's lower-margin businesses, which enabled the unit's adjusted operating margin to turn positive in Q1, and the growth of its higher-margin advertising business.

Where will Baidu's stock be in a year?

Baidu didn't provide any exact guidance for the rest of the year, but its revenues and margins could continue to rise as China reopens and the macro headwinds dissipate.

For the full year, analysts expect its revenue and adjusted EBITDA to rise 11% and 10%, respectively. Based on those expectations, Baidu's stock looks dirt cheap at one times this year's sales and six times its adjusted EBITDA.

Baidu's low valuations should limit its downside potential over the next 12 months as its advertising and cloud businesses benefit from China's post-COVID recovery. That said, its upside potential could also be limited by the persistent delisting threats for U.S.-listed Chinese stocks. Therefore, I believe Baidu's stock could gradually climb higher in a year, but I'm not sure it can outperform the broader market as long as its delisting threats remain unresolved.