Baidu Upgraded to Overweight on AI Opportunities

On Thursday, May 16, 2024, Baidu Inc. (NASDAQ:BIDU), a leading Chinese internet search provider, reported its first-quarter earnings before the market opened. The company revealed an earnings per share (EPS) of $0.2675, which did not meet the anticipated $2.3. Despite this, Baidu's revenue reached approximately $4.36 billion, slightly exceeding the expected $4.31 billion. This mixed financial performance showcases the challenges and successes Baidu faced during the quarter.

Following the earnings announcement, Baidu's stock experienced a decline of up to 5.5% in the morning trading session. This drop occurred despite the company surpassing earnings estimates for the first quarter of 2024, with earnings of $2.76 per American depositary share (ADS) on sales of $4.4 billion. These figures exceeded analysts' expectations of $2.18 per ADS and $4.3 billion in revenue. However, by late morning, the company's stock was still down about 1%, indicating investor reactions to the earnings report.

The decrease in Baidu's stock price can be attributed to its earnings, as calculated according to generally accepted accounting principles (GAAP), which were significantly lower than both the pro forma number and analyst forecasts, at only $2.06 per share. Additionally, the company's year-over-year earnings declined by 6%, and sales growth was modest at only 1%. Despite these challenges, Baidu did report a 3% growth in online marketing revenue, highlighting some areas of strength within its business model.

Baidu, headquartered in Beijing, is recognized as the leading search website in China and competes with global giants like Alphabet's Google. The company has diversified its operations to include cloud-computing services, a streaming service, and an autonomous vehicle division, among others. This diversification strategy is part of Baidu's efforts to maintain its leadership position and drive future growth.

Financially, Baidu has a price-to-earnings (P/E) ratio of approximately 118.59, indicating a higher valuation compared to the earnings it generates. The price-to-sales (P/S) ratio stands at about 2.22, suggesting that investors are willing to pay $2.22 for every dollar of sales. These financial metrics, along with others such as the debt-to-equity (D/E) ratio of about 0.34 and the current ratio of approximately 2.79, provide insights into Baidu's financial health and investor perceptions of its value.

Baidu's (NASDAQ:BIDU) reported first-quarter revenue that exceeded expectations, while earnings aligned with analyst estimates. The company reported Q1 earnings per share (EPS) of RMB16.10, meeting consensus estimates. Revenue for the quarter was RMB31.51 billion, surpassing the projected RMB31.43 billion.

Baidu's core business generated revenue of RMB23.80 billion, exceeding the estimated RMB23.58 billion. Conversely, revenue from iQIYI was RMB7.9 billion, falling short of the expected RMB8.02 billion.

Robin Li, Co-founder and CEO of Baidu, noted that the company’s online marketing revenue remained stable, and the end-to-end optimization of their AI technology stack continued to drive growth in AI Cloud revenue. He highlighted the emergence of a new era of Gen-AI in China, with foundation models like ERNIE serving as crucial infrastructure, enhancing various aspects of life. Li emphasized Baidu's efforts to make the ERNIE family of models more affordable and efficient, which should create more opportunities for the company.

Jefferies analysts maintained a Buy rating and a $179 price target on Baidu (NASDAQ:BIDU), adjusting the analysis to account for recent business activities and adopting a more cautious outlook across various segments.

This adjustment includes expectations of a subdued advertising market in certain categories alongside tempered forecasts for both cloud and non-cloud segments. The analysts emphasized the crucial role of artificial intelligence (AI) in enhancing monetization opportunities and operational efficiencies, highlighting its vast potential. Despite these adjustments, the full-year projections for Baidu have not been altered.

Baidu’s (NASDAQ:BIDU) shares declined over 7% intra-day today as the company revealed Q4 revenues that fell short of expectations. The company reported earnings per share (EPS) of RMB21.86, surpassing the consensus of RMB17.58. However, revenue stood at RMB34.95 billion, missing the Wall Street forecast of RMB35.14 billion.

The revenue from Baidu Core reached RMB27.49 billion, exceeding expectations of RMB27.31 billion, while revenue from its video streaming service iQIYI was RMB7.7 billion, below the expected RMB7.86 billion.

Baidu also reported monthly active users (MAUs) totaling 667 million, which was higher than the 658.74 million anticipated by analysts. Additionally, the non-GAAP operating margin for Baidu Core was reported at 23%.

Baidu’s (NASDAQ:BIDU) shares declined over 7% intra-day today as the company revealed Q4 revenues that fell short of expectations. The company reported earnings per share (EPS) of RMB21.86, surpassing the consensus of RMB17.58. However, revenue stood at RMB34.95 billion, missing the Wall Street forecast of RMB35.14 billion.

The revenue from Baidu Core reached RMB27.49 billion, exceeding expectations of RMB27.31 billion, while revenue from its video streaming service iQIYI was RMB7.7 billion, below the expected RMB7.86 billion.

Baidu also reported monthly active users (MAUs) totaling 667 million, which was higher than the 658.74 million anticipated by analysts. Additionally, the non-GAAP operating margin for Baidu Core was reported at 23%.

Morgan Stanley analysts maintained their Overweight rating on Baidu (NASDAQ:BIDU), expressing optimism about the company's stock performance in the near term.

The analysts commented that there is a strong likelihood for the stock's price to rise in the next 60 days, citing its recent decline as a factor that has made its short-term valuation particularly attractive. The stock price, according to the analysts, has undergone a significant correction due to market concerns surrounding the recent developments with Ernie Bot. Despite these concerns, they foresee an improvement in Baidu's fundamentals towards the fourth quarter of 2023 and into 2024.

This anticipated improvement is expected to be driven by advertising growth outpacing GDP growth and a pivotal rise in cloud growth, fueled by incremental contributions from AI technologies. The analysts estimate a 70% to 80% probability, or a "very likely" chance, of this scenario occurring.

Baidu’s (NASDAQ:BIDU) AI model, known as Ernie Bot internationally and as Wenxin Yiyan in China, recently surpassed a user base of over 100 million. Bloomberg reported that Baidu's Chief Technology Officer, Wang Haifeng, announced this achievement at a recent conference.

The model's user count surged rapidly within just two months of its launch in 2023, underscoring its appeal and contribution to the development of large language models (LLMs). Following the rapid expansion of generative AI technologies, the Chinese government's State Internet Information Office, along with six other departments, has implemented provisional rules to regulate services centered around AI.