Baidu: Buy it before results are released (NASDAQ:BIDU)

Baidu (NASDAQ: STAR) (OTC:BAIDF) may be one of the most underrated, underappreciated, and undervalued AI companies in the world. Baidu's main flaw is that it is a Chinese company suffering from a temporary image problem due to a shift to negative sentiment and temporary growth problems in China-specific stocks.

Baidu's market cap plummets

After peaking at over $100 billion in 2021, Baidu's market capitalization recently fell to only $30 billion. In addition, Baidu has accumulated a strong cash position and the company's enterprise value is only around 20 billion dollarsThis is ridiculous because Baidu will generate around $20 billion in sales this year, which puts its EV/sales ratio at about one.

Baidu has become accustomed to exceeding consensus estimates and could beat its next earnings announcement on 8/22/24. Baidu's tendency to beat sales and EPS estimates could persist and the company can continue to beat forecasts in the future.

Furthermore, Baidu has a leading position in search, artificial intelligence, cloud, autonomous driving, and other lucrative segments that should translate into higher sales growth and improved profitability. This dynamic of improving growth and higher profitability metrics should allow Baidu stock to rise much higher in the coming years.

Baidu 5-year chart

Baidu is likely going through a long-term bottoming process. We see a low around $80 after the coronavirus crash. We then saw the epic rally turn into a bubble, which burst in early 2021, hit the ultimate low around $70-$80 in late 2022, and most recently retested support around $80.

Baidu stock is trading in a wide range from $80 to $150. Therefore, the downside is likely to be minimal and the upside is likely to be considerable, to around $150 in a trading-like scenario. There may be a substantially larger upside in a long-term investment scenario, where Baidu stock could rise to $200-300 or more in the long term.

Autonomous driving could be a breakthrough for Baidu

In China, it is possible to travel six miles in a driverless taxi. Only about 50 centsOf course, this dynamic is causing anxiety in the taxi industry at large. But for companies like Baidu, the robo-taxi business represents the potential for a significant revenue stream.

While it is difficult to determine an exact figure, Initial evidence shows that the robotaxi segment could be very lucrative for Baidu, generating considerable sales and profitability in the coming years.

Another crucial factor is that Baidu is not a struggling electric vehicle startup. It is a highly successful internet company, a leading search business in China that can build one of the most successful and profitable robotaxi fleets, especially when you consider the advantage of operating on its home turf in the world’s most promising car market. And we can’t forget its massive cash pile of more than $10 billion. position.

It remains number one in searches in China

Although Baidu has ceded some of its market share to Bing, it remains the leader in search in China, and the decline in market share could be temporary. Baidu remains in an advantageous position in search in China and can continue to benefit from its relationship with the CCP government, which helps it stay on top of the search engine market in China. Furthermore, despite the decline in market share, Baidu's search-related revenue increased by 18.5 billion yuan in its latest quarterly announcement, compared with $18 billion in the same quarter last year.

Amazingly, with Baidu, you get China's leading search engine and app developer for an enterprise value of only about $20 billion. Plus, you get one of China's leading cloud companies with Baidu AI CloudPlus you get massive AI, robotaxi and autonomous driving potential. Plus you get Netflix/YouTube-like content and an entertainment platform through Baidu's iQiyi.

So with Baidu we have a great internet conglomerate that is missing one ingredient: growth. Fortunately, this is likely to be just a temporary setback.

Despite projections of very little growth, Baidu has far exceeded consensus estimates over the past year. It's not just the past year, as Baidu has beaten each of its quarterly EPS announcements. In the last five yearsFurthermore, Baidu only missed revenue forecasts once during these five years, illustrating the company's stability and ability to beat analyst consensus figures. Yet the stock gets no respect.

TTM EPS Consensus Estimate Baidu's stock price was $9.37, but Baidu instead reported $11.75, which is a high return of over 25%. This dynamic illustrates how unreliable Baidu's estimates have become and that the market is likely too negative on China, particularly Baidu. Furthermore, the underlying dynamic suggests that Baidu could continue to significantly outperform analysts' earnings per share figures.

Baidu's consensus earnings per share (EPS) estimates for fiscal 2024 and 2025 are around $11 and $11.50, respectively. However, if Baidu has the tenacity to beat consensus estimates, it can beat the lower numbers. Even if it beats them by a modest 15%, we could see around $12.50 in earnings per share this year and $13.25 in 2025.

Given that its shares are at around $90 here, Baidu's forward P/E ratio may only be around 6.7, which is incredibly cheap for a stock in Baidu's market-leading position, and the prospects for further growth and profitability increase as we go further.

Where Baidu stock could be in the future:

The year	2024	2025	2026	2027	2028	2029	2030
Income Bs	$19.8	$22.5	$24	$26	$29	$32	$34
Revenue growth	6%	14%	7%	9%	10%	9%	8%
EPS	$12.50	$13.25	$14	$16	$18	$20	$23
EPS growth	11%	6%	6%	14%	14%	12%	11%
Forward P/E	10	12	14	15	16	17	18
Share price	$132	$168	$224	$270	$320	$390	$455

Click to enlarge

Source: The Financial Prophet

A P/E ratio of 6-7 is too cheap for Baidu, and this low valuation may be temporary as such a low P/E ratio may be unsustainable. It could expand substantially when evidence of further growth materializes. Baidu's growth could improve as its AI monetization increases and growth returns to the Chinese economy.

Lower rates in the US and elsewhere should also help alleviate some of China's growth problems. As Baidu's price-to-earnings ratio expands into the 10-20 range, its stock could appreciate considerably, especially as its earnings will likely continue to rise due to growth and profitability improvements in the coming quarters.

Take a risk Baidu

Baidu faces risks, and one of the main risks is a continued attack on its search business, which is its main lifeline. The rise of Microsoft and Google searches in China is a concern, and Baidu must maintain its leadership position in search to enable healthy business dynamics. In addition, we should see continued cloud growth as Baidu faces increased competition in the cloud segment. In addition, geopolitical risks and general tensions in China are a constant concern. Baidu faces competition from AI and increasing competitors in other segments. Investors should consider these and other risks before investing in Baidu.