Baidu Stock: The Rally Can Continue (NASDAQ:BIDU)

Thesis

Baidu (NASDAQ:BIDU) reported wonderful Q3 2022 outcomes, beating analyst estimates as regards to each income and earnings. Moreover, with the tailwind of an enhancing COVID state of affairs in China, administration additionally gave an upbeat outlook for This autumn and going into 2023.

Personally, I stay tremendous bullish on Baidu stock – each as a operate of valuation and future potential anchored on AI enterprise initiatives. And on the backdrop of EPS upgrades, I increase my goal worth for Baidu stock to $256.90/share, as in comparison with $237.80/share prior.

For reference, Baidu stock is down about 25% YTD, as in comparison with a lack of roughly 20% for the S&P 500 (SP500).

Stronger Than Expected Q3 Results

Although Baidu’s September quarter was nonetheless pressured by COVID headwinds and different macroeconomic challenges, the web large posted sturdy outcomes – beating analyst consensus estimates as regards to each income and earnings.

During the period from July to the top of September, Baidu generated whole revenues of roughly $4.57 billion, which compares to about $4.48 billion for a similar interval one 12 months earlier (10% 12 months over 12 months development), and $4.15 billion for Q2 2022 (10% quarter over quarter development). Analyst had anticipated income of about $4.51 billion ($60 million beat)

During Q3, Baidu additionally improved profitability and reported working earnings of $747 million, representing a 130% year-over-year development versus the identical interval one 12 months earlier, and a 56% quarter over quarter development as in comparison with Q2.

Adjusted internet earnings expanded about 4.5% year-over-year, to $4.2 billion; and EPS got here in at 96 cents, which is roughly 6 cents greater than what analyst consensus anticipated. Earnings per ADS got here in at $2.37, which beat analyst consensus estimates by 12 cents.

Other highlights for the quarter embrace:

Share buy-backs: During the September quarter, Baidu returned $272 million to shareholders, which interprets into an annualized equity yield of roughly 2.5%.

AI Cloud income expanded by roughly 25% 12 months over 12 months and now accounts for nearly 30% of the web large’s whole revenues. Moreover, Baidu reported that the corporate’s ACE sensible transportation options are actually adopted in 63 cities, and have reached a cumulative contract worth of about RMB630 million.

Intelligent Driving: Baidu’s robo-taxi platform Apollo Go accomplished roughly 474K rides in Q3 2022, which displays a 311% 12 months over 12 months development and a 65% quarter over quarter development.

Mobile Ecosystem: In Q3, Baidu App’s MAUs grew to 634 million, which is a 5% 12 months over 12 months enhance versus Q3 2021.

Reflecting on sturdy Q3 outcomes, Baidu co-founder and CEO Robin Li commented: (emphasis added)

Baidu Core delivered a stable set of monetary and operational ends in the third quarter, regardless of the continued challenges posed by the COVID-19 resurgence. Baidu Core’s income resumed constructive development, pushed by a gradual restoration of our on-line advertising enterprise and the regular development of our AI Cloud income. Notably, we continued to make important progress in clever driving. On the one hand, Baidu Apollo’s auto options continued gaining recognition amongst main automakers. On the opposite hand, Apollo Go continued scaling up its operation, finishing greater than 474,000 rides within the quarter, additional strengthening its main place within the world autonomous ride-hailing market

Looking forward, we anticipate our cell ecosystem to proceed producing sturdy money circulation and fund our funding in AI Cloud and clever driving, which is able to assist keep our management within the new AI enterprise and drive long run enterprise development.

Confidently Stepping Into This autumn And Early 2023

With the COVID lockdowns easing, Baidu administration voiced a constructive outlook for This autumn 2022 and early 2023. In the analyst Q&A session following Q3 outcomes, Baidu CEO Robin Li stated:

In Q3, Baidu Core advert income was down 4% year-over-year, however improved from the second quarter’s 10% year-over-year decline, as macro has improved progressively since June. Encouragingly, revenues from healthcare and retail recorded constructive year-over-year development within the quarter.

And following a query from Alicia Yap (Citigroup) how analysts ought to take into consideration the restoration in promoting income, Robin Li added:

I feel the short-term will in all probability nonetheless be fairly risky, however the economic system ought to enhance within the mid-term and past. China has been preventing in opposition to this COVID for nearly three years and the nation has been gaining expertise.

Our revenues are very delicate to COVID management measures …

… So, as soon as COVID and macro conditions enhance, our advert revenues from totally different verticals akin to journey, franchising or native providers ought to rebound.

Baidu’s confidence round This autumn and 2023 is according to what analyses of main funding banks. With zero-COVID restrictions lifting, Goldman Sachs sees China’s economic system develop by 4.5% in 2023, and Morgan Stanley estimates GDP development for 2023 at 5.4%.

Although analysts are progressively changing into increasingly bullish on China’s macro outlook, estimates for Baidu stay – in my view unreasonably – depressed, and have solely just lately began to tick upwards.

Target Price: Raise To $256.90

Expecting a pointy financial rebound in China, which strongly helps Baidu’s promoting enterprise, I estimate that Baidu’s EPS in 2023 will probably develop to someplace between $9.80 and $11.20. Moreover, I additionally increase my EPS expectations for 2024 and 2025 to $12.44 and $13.55, respectively.

I proceed to anchor on a 4.5% terminal development charge, in addition to on a ten% value of equity.

Given the EPS upgrades as highlighted under, I now calculate a good implied share worth of $256.90

Below can be the up to date sensitivity desk.

Risks and Headwinds

As I see it, there was no main threat replace since I initiated protection on Baidu stock. Thus, I wish to spotlight what I’ve written earlier than. However, though the headwinds persist to some extent, please be aware that sentiment surrounding to all of those threat buckets seems to be enhancing.

First, the economic system in China is at present pressured by a number of headwinds together with inflation, real-estate disaster and COVID-19 lockdowns. If the Chinese economic system would gradual greater than what is anticipated and priced in, buyers ought to modify expectations for Baidu’s quick/mid-term enterprise monetization accordingly.

Second, China’s web/tech firms are strongly uncovered to regulatory threat. While the worst appears to be behind us, the elevated threat publicity persists.

Third, a lot of Baidu’s share worth volatility is at present pushed by investor sentiment in the direction of Chinese ADRs and threat property. Thus, Baidu stock worth may present sturdy worth volatility although the corporate’s enterprise fundamentals stay unchanged.

Conclusion

Baidu stock is up roughly 31% since I’ve argued that the stock might rebound quick and aggressively. Although this efficiency is appreciable, Baidu stock has nonetheless extra room to go – particularly with the COVID reopening in China supporting the corporate with a robust basic tailwind.

Anchored on a robust Q3, in addition to assured administration commentary for This autumn 2022 and early 2023, I’m assured to reiterate a ‘Buy’ suggestion for BIDU.