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Elevator Pitch
My rating for Baidu, Inc.’s (NASDAQ:BIDU) [9888:HK] stock is a Buy.
Earlier, I reviewed Baidu’s Q1 2022 earnings and discussed about BIDU’s AI (Artificial Intelligence) Cloud business with my article for the company published on May 31, 2022.
In this latest write-up, I offer a preview of BIDU’s third quarter financial results, and I also discuss about other catalysts and Baidu’s growth opportunities in the area of autonomous driving. These are the key items that investors need to watch before BIDU reports Q3 2022 results. I think that a Buy rating for BIDU is appropriate, after considering factors such as a potential EPS beat, short-term catalysts, and long-term growth drivers.
Q3 2022 Earnings Release Data For Baidu
BIDU previously issued a media release on November 8, 2022, which highlighted that it will announce its third quarter earnings next Tuesday, on November 22, 2022 prior to trading hours.
Analysts Expect An Improvement In BIDU’s Financial Performance For Q3
Baidu is expected to deliver decent financial results in the upcoming quarter according to the sell-side analysts’ consensus financial forecasts for the company.
In local currency or CNY terms, analysts see BIDU’s YoY revenue contraction narrowing from -5.4% in the second quarter of 2022 to a marginal -0.4% for Q3 2022 as per S&P Capital IQ data.
Also, the sell-side predicts that Baidu will achieve a +6.8% YoY increase (in CNY terms) in its normalized earnings per share or EPS for the third quarter of the current year. This implies that BIDU’s bottom line expansion for Q3 2022 is expected to be much better as compared to the company’s +2.5% YoY normalized EPS growth for Q2 2022 and its -28.0% YoY normalized EPS drop in Q3 2021.
My Prediction Is That Baidu’s Third Quarter Earnings Will Exceed Expectations
I am predicting that BIDU will generate higher-than-expected earnings for the third quarter of 2022.
With respect to the top line, Baidu’s revenue should be boosted by market share gains at the expense of smaller competitors.
An October 28, 2022 research report published by brokerage CMB International citing data from data analytics firm MoonFox noted that “leading internet giants are enlarging their shares in user time spend.” According to MoonFox data, the proportion of time that Chinese users devoted to mobile applications from China’s four leading technology companies, “Tencent (OTCPK:TCEHY) (OTCPK:TCTZF), ByteDance (BDNCE), Alibaba (BABA) (OTCPK:BABAF) and Baidu” grew from 68.4% in June 2022 to 69.3% in September this year.
In terms of the bottom line, BIDU’s focus on cost management should enable the company to deliver better-than-expected profit margins in the third quarter of the current year.
Excluding its streaming business, iQIYI (IQ), the non-GAAP adjusted operating margin for Baidu’s core businesses improved by approximately +5 percentage points from 17% in Q1 2022 to 22% for Q2 2022 as disclosed in its earnings press release. At its Q2 2022 earnings call, BIDU attributed the substantial improvement in the company’s operating profitability for the second quarter to the fact that “we have made a lot of efforts to improve our operational efficiencies” in the last couple of months.
Notably, there is significant room for profitability improvement with the company’s AI Cloud business. Baidu stressed at the company’s most recent quarterly investor briefing that its AI cloud business will “focus on high-quality revenue growth” and exit “unhealthy projects” progressively.
In conclusion, I expect Baidu to report a Q3 2022 EPS beat next Tuesday.
Other Potential Short-Term Catalysts For Baidu
In my opinion, the share price performance of Baidu (-44.7% in the past year) and its US-listed Chinese technology peers have been negatively affected by a couple of issues.
The three key issues that have been a drag on BIDU’s stock price are China’s COVID-zero policy, US-China tensions, and the regulatory crackdown on the Chinese technology sector. There appears to be positive developments in these areas, which could potentially serve as catalysts for BIDU apart from the potential of a third quarter earnings beat.
Firstly, China seems to be gradually pivoting away from the country’s COVID-zero approach. A November 16, 2022 Wall Street Journal article mentioned that “many local authorities” in Mainland China have gone ahead with “further relaxation of control measures” even though the number of confirmed COVID-19 pandemic cases are going up.
Secondly, Biden met with China’s president Xi on November 14, 2022 at the G20 summit. A BBC news commentary on the same day referred to this as a “conciliatory meeting” and highlighted Biden’s comments that “there will be no ‘new Cold War'” between the US and China. At the very least, this suggests that a further escalation of tensions between the two countries in the near term is less likely.
Thirdly, it is possible that we have already seen the worst of the regulatory crackdown on China’s technology industry. Chinese media platform Pan Daily published an article on November 16, 2022 citing comments by state media, People’s Daily “that video games have already become an industry of great significance to a country’s industrial development and technological innovation.” Considering that games are a sub-segment of the technology industry, the state media publication’s comments could reflect a subtle shift in Chinese policymakers’ attitudes towards technology companies in China like Baidu.
Autonomous Driving Is A Key Long-Term Growth Driver For Baidu
In my end-May 2022 article for BIDU, I cited Canalys’ estimate of a +25% 2021-2026 CAGR for the Chinese cloud services market as a key data point supporting the growth potential of Baidu’s AI cloud business in the long run. I will touch Baidu’s other key long-term growth driver, its autonomous driving business, in this section by highlighting a few key metrics.
BIDU disclosed at its Q2 2022 results briefing that “the total projected accumulated sales of our auto solutions have grown to RMB10.3 billion.” As a comparison, Baidu’s trailing twelve months’ revenue is approximately RMB77 billion, so BIDU’s current automotive backlog (at 13% of its top line) is reasonably significant.
Separately, Baidu noted in its second quarter results press release that it became the first company in China to provide “fully driverless ride-hailing services” branded as Apollo Go. This indicates that BIDU has secured a meaningful first mover advantage in this space.
Also, BIDU is “the world’s largest autonomous ride-hailing service provider” according to an October 17, 2022 Goldman Sachs (GS) research report (not publicly available) titled “Autonomous Vehicles The Road Ahead: New Profit Pool Emerging.” In GS’ report, analysts cite Apollo Go’s “L4 autonomous driving mileage of 32mn kilometers” in determining that Baidu is the global leader in this space.
Concluding Thoughts
I rate BIDU’s shares as a Buy. In the short term, an earnings beat and other catalysts such as China’s COVID-zero pivot and a potential easing of US-China tensions will be positive for Baidu. In the long run, Baidu’s AI Cloud and autonomous driving businesses have good growth potential.
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