Baidu (BIDU 7.65%) posted its third-quarter earnings report on Nov. 21. The Chinese tech giant's revenue rose 6% year over year to 34.45 billion yuan ($4.72 billion) and cleared analysts' expectations by 240 million yuan. Its adjusted net income grew 23% to 7.27 billion yuan ($996 million), which also exceeded analysts' expectations by 990 million yuan, while its adjusted earnings per ADS rose 21% to $2.80.
Baidu's headline numbers seemed healthy, but does its stock still have room to run after rallying about 20% over the past 12 months? Let's review its growth rates, near-term challenges, and valuations to see where its stock might end up in a year.
Baidu's core growth engines are cooling off again
Baidu owns the largest online search engine in China. That platform, along with its associated portal sites and managed business pages, generates most of its online marketing revenue, which accounted for 57% of its third-quarter revenue.
iQiyi, the streaming video platform that it spun off in an IPO in 2018 but retains a majority stake in, generated 23% of its revenue. The remaining 20% of its revenue came from its non-online marketing business -- which includes its cloud platform and artificial intelligence (AI) services. Here's how those three businesses fared over the past year.
Segment |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
---|---|---|---|---|---|
Online Marketing Revenue Growth (YOY) |
(4%) |
(6%) |
6% |
15% |
5% |
iQiyi Revenue Growth (YOY) |
(2%) |
3% |
15% |
17% |
7% |
Non-Online Marketing Revenue Growth (YOY) |
25% |
11% |
11% |
12% |
6% |
Total Revenue Growth (YOY) |
2% |
0% |
10% |
15% |
6% |
Baidu's online marketing suffered a slowdown throughout 2022 as it grappled with macroeconomic, competitive, and COVID-19-related headwinds. However, that core business returned to growth this year as the COVID-19 lockdowns ended, it expanded its managed business pages to reduce its dependence on search-based ads, and it benefited from the stabilization of China's healthcare, travel, local services, and business services sectors.
However, the growth of its online marketing business still decelerated in the third quarter as China's e-commerce companies purchased fewer ads. But despite that slowdown, CEO Robin Li said during the conference call that he was still "optimistic" that the growth of its "online marketing revenue will continue to exceed China's GDP growth."
That outlook sounds confident, but Baidu still faces intense competition from Tencent's WeChat, ByteDance's Douyin (known as TikTok overseas), and Alibaba's onlinemarketplaces in the crowded advertising market. iQiyi, which also experienced a slowdown in the third quarter, faces persistent competition from Tencent Video, Alibaba's Youku Tudou, and Douyin in the streaming video market.
Meanwhile, Baidu's growth in non-online marketing revenues decelerated as a slowdown in smart transportation projects (including driverless cars) across China curbed the growth of its AI cloud business. Its AI cloud revenue fell 2% year over year in the third quarter, but it expects it to return to growth in the fourth quarter as it laps the transportation sector's slowdown.
That slowdown wasn't disastrous, but it likely disappointed investors who had expected a continuation of Baidu's accelerating growth in the first half of 2023. Analysts expect its revenue to rise 11% (in RMB terms) for the full year and 8% in 2024.
But its margins are still healthy
On the bright side, Baidu's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin still expanded by one percentage point sequentially and year over year to 28% in the third quarter.
That expansion was mainly driven by tighter spending across iQiyi and its AI cloud business. During the conference call, Li said it would continue to "realign" the AI cloud segment's resources to focus on the expansion of its AI services and "shift away from lower priority efforts" to balance its investments with its margins.
Analysts expect Baidu's adjusted EBITDA margin to rise from 24% in 2022 to 25% in 2023, then dip slightly to 24% in 2024. We should take those estimates with a grain of salt, but they suggest Baidu can still afford to expand its core businesses and fend off the competition without crushing its own margins.
Its stock still looks cheap
Baidu trades at just 13 times forward earnings and four times next year's adjusted EBITDA. By comparison, Alibaba trades at 11 times forward earnings and 6 times next year's adjusted EBITDA, while Tencent trades at 18 times forward earnings and 4 times next year's adjusted EBITDA.
All three "BAT stocks" are trading at low valuations due to persistent concerns regarding China's economic slowdown, the tech war between China and the U.S., and the unresolved delisting threats for Chinese stocks.
Those challenges could continue to compress Baidu's valuations for the foreseeable future. Therefore, I personally believe Baidu's downside potential will be limited over the next 12 months -- but I don't expect it to outperform the market again unless its revenue growth accelerates again or the U.S. and China settle their differences.