Baidu (BIDU 0.62%) posted its second-quarter report on Aug. 22. The Chinese tech giant's revenue rose 15% year over year to 34.1 billion yuan ($4.7 billion), which beat analysts' estimates by $130 million. Its adjusted net income grew 44% to 8.0 billion yuan ($1.1 billion), or $3.11 per American Depositary Shares (ADS), and also cleared the consensus forecast by $0.78.
Baidu's headline numbers were impressive, but its stock rose less than 3% after the report and remains down about 2% over the past 12 months. Should investors scoop up some shares of this growing company as the bulls look the other way?
Image source: Getty Images.
Another quarter of accelerating growth
Baidu controls nearly 60% of China's online search market, according to StatCounter. That core business feeds the growth of its online marketing business, which accounted for 58% of its revenue in the second quarter. This segment makes money by selling display ads, promoted search results, and managed pages -- which enable businesses to easily build their websites and online stores within Baidu's walled garden.
Another 23% of its revenue came from iQiyi (IQ 3.53%), the streaming video platform that it partly spun off in an IPO in 2018. Its non-online marketing businesses -- which include its cloud and AI services -- brought in nearly 20% of its revenue. Here's how those three core businesses fared over the past year:
|
Segment |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
|---|---|---|---|---|---|
|
Online Marketing Revenue Growth (YOY) |
(10%) |
(4%) |
(6%) |
6% |
15% |
|
iQiyi Revenue Growth (YOY) |
(13%) |
(2%) |
3% |
15% |
17% |
|
Non-Online Marketing Revenue Growth (YOY) |
22% |
25% |
11% |
11% |
12% |
|
Total Revenue Growth (YOY) |
(5%) |
2% |
0% |
10% |
15% |
Data source: Baidu. YOY = Year-over-year.
Baidu's online marketing segment suffered a slowdown last year as China's COVID-19 lockdowns, macro headwinds, and tough competition from other advertising platforms throttled its growth. However, its growth turned positive and accelerated in the second quarter as the COVID lockdowns ended. It expanded its managed pages to reduce its dependence on search-based ads, and several of its top markets (most notably healthcare, travel, local services, and business services) recovered.
iQiyi also suffered a post-pandemic slowdown as people watched fewer streaming videos, but it returned to growth over the past three quarters as it rolled out new content and locked in more paid subscribers. Its non-online marketing segment also recovered as more businesses ramped up their spending on its cloud services again.
Baidu's recent growth shuts down three bearish arguments: 1) that its advertising business will struggle to keep pace with Tencent's WeChat and ByteDance's Douyin (known as TikTok overseas); 2) that iQiyi's growth will stall out in China's crowded streaming video market; and 3) that larger cloud platforms like Alibaba Cloud, Huawei Cloud, and Tencent Cloud will curb the growth of its cloud platform.
Looking ahead, the secular growth of the AI market could also drive more customers to its large language platform, ERNIE (Enhanced Representation through Knowledge Integration), and its integrated chatbot. The expansion of the driverless vehicle market could also push more automakers to adopt its Apollo platform for autonomous features. All of those next-gen services could connect more customers to its Baidu AI Cloud platform.
Another quarter of expanding margins
As Baidu's sales growth accelerated, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin expanded three percentage points year over year and one percentage point sequentially to 27% in the second quarter.
That expansion was driven by its stronger sales growth, tighter spending, and higher operating margins at iQiyi and Baidu AI Cloud. iQiyi's operating margin expanded year over year from 2% to 8% as it generated more revenue from its higher-margin subscriptions instead of its lower-margin ads. Baidu AI Cloud also maintained positive adjusted operating margins for the second straight quarter as it streamlined its business and phased out its lower-margin services.
The valuations and verdict
Analysts expect Baidu's revenue and adjusted EBITDA to both rise 11% for the full year. Based on those expectations, Baidu's stock looks cheap at just one times this year's sales and six times its adjusted EBITDA. Tencent, which is expected to generate slower revenue growth this year, trades at four times this year's sales and 12 times its adjusted EBITDA. In short, Baidu's low valuations could limit its downside potential -- but its stock could continue to trade at a discount if concerns about China's economic recovery and delisting risks in the U.S. prevent the bulls from rushing back.
Baidu's stock is worth nibbling on right now, but investors shouldn't expect it to blast off until China's economy warms up and tensions between the U.S. and China ease. Over the long term, it might just generate more reliable gains than Tencent, which is still heavily dependent on the fickle gaming market, or even Alibaba, which is evolving from an e-commerce and cloud giant into a more diversified conglomerate.
