Despite Baidu (NASDAQ:BIDU) providing more bullish AI data points, the stock continues to trend lower. Chinese stocks remain out of favor, causing valuations to sink to unthinkable levels a few years back. My investment thesis remains ultra-bullish on the Chinese search leader turning into an AI leader, but the catalyst turning the stock market bullish on Baidu is unclear, with AI growth potential not doing the trick so far.
AI Boom
Baidu just announced passing 200 million AI chat users on Ernie Bot. The company announced a lot of developments at the Create 2024 Baidu AI Developer Conference as AI tools continue to expand at an exponential pace, though actual AI revenues are still minimal.
The Chinese search leader last listed 100 million Ernie chat users back in December. According to Reuters, the AI chat tool had 14.9 million users during March, but the Kimi chatbot from Alibaba (BABA) funded Moonshot AI is quickly catching up with 12.6 million users last month.
Baidu definitely would benefit more from being the Chinese AI leader, but the company has multiple paths to success. A few weeks ago, the rumor was Apple (AAPL) had a deal with Baidu to incorporate AI chat features on devices in China. Similar to search, Apple supposedly has a deal with Google (GOOG, GOOGL) for AI chat in the U.S. and other regions, but the service isn’t approved for China usage.
In the Q4’23 earnings call, the Chinese company listed Samsung and Honor smartphones as already using Baidu AI chat features. The Chinese company announced other AI toolkits – AgentBuilder, AppBuilder, and ModelBuilder to boost creativity in AI. Baidu had 26,000 enterprise using Ernie through API and another 4,000 merchants using the AI chatbot.
The AI business already has a large usage level for the generative AI products. The 2024 key is monetizing the AI usage, with Baidu producing a few hundred million RMB in ad related revenues during Q4. The company forecast revenues reaching a few billion RMB in 2024, or the equivalent of ~$300 million.
On the earnings call, CEO Robin Li provided more details about revenue, suggesting the Q4’23 generative AI revenues were actually $92 million during the last quarter:
On a combined basis, the total internal and external AI Cloud revenue was RMB8.4 billion in Q4, with Gen AI and foundation model contributing around RMB656 million.
The numbers would suggest generative AI has a starting point of several billion RMB to start the year. A big focus on the Q1’24 earnings report on May 16 will be the revenue potential as the business approaches the mid-point of 2024.
Ignored Stock
Despite all of the promising AI numbers, Baidu actually trades at multi-year lows. The Chinese stock has struggled to grow in the last few years due to Covid policies and new tech regulations in the communist country.
The big question now is whether Baidu is officially back in sustainable growth mode. The company has the promising AI business, and Intelligent Driving offers Baidu a second major growth opportunity via current robotaxi services launched throughout several Chinese cities. Apollo Go grew autonomous rides by 49% to 839K.
Management only provided investors with visibility to growth exceeding the Chinese GDP growth rate, but investors rightfully would expect the countries generative AI leader to generate revenue growth doubling and tripling GDP rates. The current consensus estimates only forecast Baidu growing annually around a 7% rate.
The stock trades at just 9x EPS targets of $10.75 for 2024. Baidu has a massive war chest of $29.0 billion with a net cash balance of -$19.4 billion plus $3.5 billion in long-term deposits, leading to the stock only having a minimal enterprise value of ~$10 billion.
The valuation is mind-boggling for a generative AI leader in one of the largest economies in the world. The company even produced free cash flow of $3.6 billion for the year and used part of that cash to repurchase cheap shares.
Takeaway
The key investor takeaway is that Baidu is too cheap. The market hasn’t gotten excited about the stock, despite the generative AI leadership in China. The company should be able to push growth rates higher, and the key to a rally might be more sustainable growth rates closer to 10% after a period of volatile and sometimes weak numbers.
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