Baidu: A Long-Term Investment Opportunity You Can’t Afford To Miss (NASDAQ:BIDU)

Baidu Inc. (Nasdaq: BIDU) is well-positioned to become a dominant player in China’s artificial intelligence market and the growing digital advertising market.The market has punished the company’s shares since its peak Valued at $100 billion. Despite this, BIDU has performed well with his TTM revenue of $17.4 billion, operating cash flow of $3.2 billion and free cash flow of $1.7 billion.

We believe we purchased Baidu, Inc. due to a combination of strong fundamentals and future growth opportunities. Let’s take a look at what we do.

Business overview:

Baidu, Inc., also known as the “China’s Google,” is a Chinese technology company specializing in Internet-related services and products, including AI and cloud-based services. BIDU has a mobile he ecosystem that provides a platform for users to consume information, interact and engage with others, and trade with merchants through his flagship app, his Baidu app.

As of Q3 2022, the Baidu app has 634 million monthly active users. In addition to this, BIDU is the leading search engine in China with his over 1.4 billion population. The company’s core business “Baidu Core” is based on AI, especially Baidu Core, which provides search base, feed base and other online marketing services, generating more than 75% of his total revenue . BIDU also offers cloud services, a rapidly growing segment. Now, this makes the company his fourth largest cloud computing business player in China. Finally, BIDU operates ‘iQIYI’, an innovative online entertainment service that leads the market in China. 25% of total revenue.

Financial overview:

According to revenue, operating cash flow and market valuation, BIDU is still relatively small compared to other Chinese technology giants.TTM’s revenue is $17.4 billion, operating cash flow is $3.2 billion, current market valuation At $46.1 billion, BIDU still has a long runway of growth. The company primarily generates revenue through his two segments. Baidu Core accounts for more than 75% of his revenue. Within its core segment, Baidu Cloud showed significant growth, generating $2.4 billion in revenue in 2021. This represents a 64% year-on-year increase in revenue from 2020 to 2021.

The cloud computing segment is a key aspect of the company’s portfolio as it plays a key role in diversifying BIDU’s revenue streams, which have historically relied heavily on digital advertising revenue. In addition to this, BIDU also operates iQIYI, which competes with Tencent (OTCPK:TCEHY) Video for its users and advertising customers, generating around 25% of total revenue. While this segment is growing in his low single digits, it provides a diversified revenue stream for the company.

Management is actively investing in the company’s capabilities, spending almost 20% of its revenues on research and development. This will allow BIDU to power its search engine, artificial intelligence, and cloud computing capabilities. As mentioned above, BIDU has become the fourth largest cloud computing business player in China, so the return on investment is substantial.

The company has strong fundamentals underpinned by a high cash level of $24.4 billion. This allows the company to secure a net cash position. BIDU generated $1.7 billion in free cash flow over the past 12 months. This will provide the company with sufficient funds to buy back its shares and further invest in innovation.

Shareholder returns:

In December 2020, BIDU’s Board of Directors approved an expansion of its stock repurchase program from $3.0 billion to $4.5 billion. The company has since followed this program consistently, repurchasing its shares at an annual rate of $1 billion. This outlook is further strengthened by the fact that BIDU’s share price has experienced a significant drop, with him down 60% from all-time highs. As of the third quarter of 2022, cumulative share repurchases under this program have reached $3.2 billion. The company doesn’t currently pay a dividend, so shareholders could see an enhanced share repurchase program in the near future.

BIDU’s priority areas for future growth

A key area for Baidu, Inc.’s future growth is the enhancement of AI-powered technology to provide businesses with targeted and effective advertising solutions. BIDU has a strong presence in China’s digital advertising market and leveraging its capabilities will allow the company to capitalize on growing digital advertising spending in China, providing a solid foundation for future revenue growth. Offers. For reference, more than 81% of all advertising media in China are in the digital advertising market. This is why this market he expects to grow to $190 billion by 2026.

As mentioned above, BIDU is also a strong player in China’s cloud computing market, currently holding the fourth largest market share behind Alibaba (BABA), Tencent and Huawei. The company offers a complete suite of cloud services and solutions, including IaaS (Infrastructure as a Service), PaaS (Platform as a Service) and SaaS (Software as a Service). With this market expected to grow to $84 billion by 2025 in China alone and $1.2 trillion globally by 2027, management is looking to invest in and enhance the company’s cloud capabilities. You can expect it to continue.

A final key area of ​​growth is artificial intelligence. BIDU is a leading AI company, investing in AI capabilities since 2010. The company has a complete AI stack, including AI chips, deep learning frameworks, core AI capabilities, and an open AI platform. Open AI platforms have strong developer and business communities that help advance the capabilities of AI and make it more attractive to the market. As of December 2021, the PaddlePaddle developer community has reached his 4 million mark, serving 157,000 businesses. Using the platform creates a network effect that helps the company grow in the AI ​​market. BIDU is well positioned to tap into the global AI market, which is expected to grow to over $400 billion by 2028.

This article does not discuss the intelligent driving and Apollo Robo-Taxi opportunities. Because I believe there is still a long way to go for these initiatives to have any real impact on the company’s finances.

evaluation:

Baidu, Inc. experienced a significant drop in market valuation of over 70% from a peak of $100 billion in February 2021 to a low of $26 billion in November 2022. The company’s current market valuation is his $46.1 billion. represents a multiple of 14x operating cash flow and just over his 2.5x multiple of sales.

Despite this decline in value, the company’s long-term growth prospects remain solid as it has the potential to capture a significant share of the growing cloud computing, artificial intelligence, and digital advertising markets. It’s worth noting that China’s digital advertising and cloud computing markets are projected to reach a combined valuation of around $275 billion by 2026. These markets continue to grow and offer great opportunities for BIDU as they offer potential for expansion.

The company was valued using the market multiples method, which multiplies the future projected cash flows from operating activities by 17.

We took the analyst’s earnings projections from Seeking Alpha data and applied an operating cash flow margin of 16%. This is below operating cash flow margins of 26%, 22% and 16.1% respectively over the past three years. Given these assumptions, we applied a multiple of 17x. This multiple is below the company’s historical price-to-earnings multiple of over 17x. Using this method, he reached a market valuation of his BIDU of $72 billion by 2026.

risk:

Dependence on advertising revenue: BIDU generates a significant portion of its revenue from advertising. The reason why it is important for BIDU to diversify its revenue sources is that its financial performance may be affected by changes in the advertising market. The company’s management has aggressively implemented a strategy to diversify its revenue streams, including a focus on the rapidly expanding cloud computing market.

Semiconductor limits: It is well known that advanced semiconductors play a key role in powering a variety of potentially transformative technologies. Restrictions imposed by the United States on China may limit the ability of Chinese companies to build advanced data centers and deploy artificial intelligence. Advanced semiconductors are essential for improving the capabilities of supercomputing and artificial intelligence. The biggest impact of these restrictions will be felt by Chinese tech companies. This is because the cost of AI is very power intensive and is expected to be expensive to implement.

Conclusion

In conclusion, Baidu, Inc. is a dominant player in China’s digital advertising and cloud computing market. As these markets are expected to continue to grow, management is expected to continue investing in and enhancing the company’s AI and cloud capabilities. BIDU also has strong financial fundamentals, including strong cash levels of $24.4 billion, a net cash position and the ability to consistently generate free cash flow. Overall, Baidu, Inc. is well-positioned for growth in the digital advertising, cloud computing, and artificial intelligence markets, offering investors solid return potential.

Editor’s Note: This article describes one or more securities that are not traded on any major US exchange. Please be aware of the risks associated with these stocks.