Baidu, Inc. (NASDAQ: BIDU) has attained the market’s attention by launching its latest Artificial Intelligence chatbot, “Ernie”. As a leader in the Chinese market across multiple segments, the optimism surrounding the Chinese tech giant spread through the market, with the share price soaring nearly 22% in the last two weeks. Will this optimism last, or will caution over the broader macroeconomic outlook defeat the optimistic bulls? 

Technical 

A descending triangle broke out as the bulls took the driving seat following the news about their new AI development. This rally has shifted the price above the 50-day moving average, and the RSI signals buying pressure. However, a pre-market contraction over the news that their highly-anticipated live launch of Ernie has been shifted to a closed-door meeting could tease the bears into making a move of their own. 

A reversal back to the $150.18 resistance is on the cards if investors move to retest the breakout level. A support failure could bring lower support at $135.08 and $127.10 into play. However, the long-term estimated fair value of $172.60 provides investors a meaningful potential upside if the company can converge from these lower support levels to the fair value.  

Fundamental 

In their latest quarterly results, the company reported revenue of $4.8Bn in a $172M consensus beat. Earnings per share of $1.97 beat consensus by $0.65 to top off a solid set of quarterly results. These financial numbers are not what is driving the optimism, though, as Baidu operates in multiple high-growth sectors in China while enjoying significant market share in each of these sectors, naming search engine services, cloud computing, autonomous driving and artificial intelligence. 

Starting with its search engine services, Baidu has a significant economic moat in China that drives its cash flow generation and allows for investment into other avenues. The Baidu Search App boasts 648M monthly active users, and as the most-used search engine in China, it enjoys 84% of the market share in this segment. The global expected compounded annual growth rate of the search engine sector globally is at 11% through 2028. Their cloud computing segment is similar in its contribution to its business model, with a 9% market share. As one of their biggest revenue drivers, the company also generated $2.84Bn in advertising revenue in their latest quarter. With its major share and moat in the search engine and cloud computing segment, the company is well-situated to benefit from the growth and generate sufficient cash flows to invest in its more growth-oriented segments, like autonomous driving and artificial intelligence. 

The Chinese autonomous driving segment paints a similar picture, with a 58.9% expected compound annual growth rate between 2021 and 2023, where Baidu received the first-ever permit to deliver a ride-hailing service that is fully autonomous in Beijing. The company has been investing in its autonomous driving technology since 2017, making them a frontrunner in the market for developing self-driving cars. Their autonomous driving service provided over 561 000 rides in the latest financial year, up a whopping 162%, to highlight the rapid growth of this market segment. Furthermore, the robotaxi segment in China is also expected to grow at a 50% compound annual growth rate. In this segment, Baidu will likely be operating the largest fleet in the world, with its plan to put an additional 200 driverless taxis into the market by the end of 2023.  

Even though these revenue avenues already provide much reason for optimism, their artificial intelligence developments have investors itching. The Chinese AI market is expected to double by 2026, and Baidu plans to integrate AI fully across all its operations. Considering the fact that ChatGPT is banned in China, Baidu’s similar bot would be the first integration into this market, positioning the company extremely well to benefit from the inevitable growth in the industry. Even though the Ernie Bot’s initial launch came in the form of an instructional video, which disappointed investors wanting to see a live demonstration, there is little reason not to be optimistic about the prospects of this AI development into Baidu’s operations.  

However, with each investment, there is risk involved. The Chinese government is known to intervene in the market unexpectedly, posing huge risks to the companies operating under their reign. Delisting fears in the US emerged in recent years, sparking volatility among Chinese companies. These risks have contributed to the 32% reduction in their share price over the last five years. However, this share price reduction has opened the conversation around Baidu’s valuation and whether it may now be undervalued. The graph below shows the company’s P/FCF valuation relative to its main competitors through the five years. Alibaba has become the most undervalued on a relative basis through its 52% share price drop, while Baidu maintains one of the highest multiples, at 21X. However, when pricing in its potential growth opportunities relative to its competitors, it still appears relatively attractive. 

Summary 

Baidu enjoys significant market share in different markets that all tease a substantial runway for growth. The company, therefore, seems well poised to generate healthy cash flows and benefit from the global growth of these markets. Suppose it can successfully leverage its new AI technology across its operations. In that case, it may open up a potential 13% price upside if the share price converges to the estimated fair value of $172.76. 

Sources: Koyfin, Tradingview, Reuters, Baidu, Inc., Simply Wall Street