Cathie Wood did something on Wednesday that she hasn't done in nearly four months. The Ark Invest founder CEO added to her existing stake in Baidu (BIDU 1.63%). It seems like a good time to buy China's leading search engine operator. The stock is rallying lately, as analysts warm up to Baidu.
Baidu is becoming an unlikely winner in the tariff trade war. Despite its recent sluggish growth, Baidu is emerging as a beneficiary of the import restrictions of potent artificial intelligence (AI) chips into China. Toss in an iconic hometown brand with a rock-bottom valuation, and Baidu could be the market's latest momentum play.
NASDAQ: BIDU
Key Data Points
Back to the future
Baidu is in a funk. Revenue is declining for the fourth time in the last six years. Last month's second-quarter report failed to impress. Revenue declined 4%. The news only gets worse at the other end of the income statement, with adjusted earnings plummeting 35%. The stock was barely trading higher in 2025 a month ago, but Baidu has soared 53% since then.
You can thank Chinese import restrictions on Nvidia's H20 chip and other U.S. AI solutions for the rally in Baidu. Nvidia and its peers may have rallied earlier this summer when the framework of a deal with the White House was in place. Nvidia would offer the U.S. 15% of the revenue it generates in China as a way to get back into world's second-largest economy. It was losing billions in quarterly revenue with the restrictions, so keeping 85% of the revenue of high-margin AI training chips was better than nothing.
Unfortunately it takes two to trade tango. Reports this week out of China find Beijing internet regulators blocking companies from buying chips like Nvidia's China-specific RTX Pro 6000D, jump-starting the prospects for homegrown solutions. This is the opportunity that Baidu has been waiting for.
Image source: Getty Images.
Baidu was a Chinese pioneer in AI before it was cool. It has more AI-related patent applications -- topping 5,700 -- than any other company in China. Being early isn't enough. Its AI cloud business posted 34% year-over-year revenue growth in its latest quarter, but it wasn't enough to lift overall top-line results into positive territory. It's hard to move the needle when the sluggish online advertising business from its flagship search engine continues drum up almost two-thirds of Baidu's core revenue.
Analysts are starting to connect the dots this week. Arete boosted its rating on Baidu from sell to buy on Tuesday, a rare double upgrade. The firm believes that Baidu's Kunlun AI chip business will be a beneficiary of supply shortages in China given the trading restrictions with Nvidia. The new price target of $143 seemed high two weeks ago, but after two days of pops the stock is now just a 4% gain away from hitting that goal. On Wednesday it was Thomas Chong at Jefferies raising his target on the shares from $108 to $157, also citing the golden opportunity for Baidu's AI chips.
A cheap AI chip stock
There is still a lot of money to be made in operating the country's largest search engine. Revenue may be heading in the wrong direction, but this is still a cash cow worth milking. Other businesses -- like its iQIYI video streaming service -- are faring even worse. Search provides Baidu with the means to make big early bets on emerging industries, like it did with AI that could be the ticket to make it a market darling again.
In the meantime, Baidu is cheaper than you probably think. Despite soaring more than 50% over the past month, the stock is trading for less than 13 times trailing adjusted earnings. Profits are going the wrong way right now, but analysts see a return to bottom-line growth starting next year. Analysts see Baidu trading for just 9 times their profit targets for 2028 and less than 8 come 2029. The shares moving higher will naturally also drive those multiples higher, but Wall Street pros aren't baking in the kind of profitability that Baidu can achieve if its AI chip business continues to take off. The margins won't be as wide in AI as its search business, but this could become a major contributor if Baidu continues to sign up major Chinese customers.
If you're looking for a cheap AI stock that is somehow becoming a winner at the expense of Nvidia and the trade war, this could be it. Ark Invest's Wood seems to think so. It will be interesting to see if she continues to build up her stake as analysts revisit the former market laggard.
