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Baidu Stock: Ride the Cloud to Profits

Story Highlights

While certainly not perfect, Baidu’s recently released financial figures beat Wall Street’s expectations and analysts are cheering. So, despite China’s challenges, Baidu stock looks like a buy as the company delivers strong  cloud and artificial-intelligence segment results.

Beijing-headquartered Baidu (BIDU) provides artificial intelligence (AI), cloud, and Internet search services in China. I am bullish on the stock.

There’s no denying it, investing in Chinese technology businesses has been a challenge. The nation’s crackdown on tech-related businesses, based on security concerns, has been well documented. This factor could cause some traders to avoid Baidu stock, based on fear that Baidu can’t thrive in this restrictive environment.

On top of that, some investors may be worried about restrictions in China due to the COVID-19 pandemic. This is a valid concern, so Baidu’s financial results should be monitored carefully. Prospective investors can check to see if Baidu managed to mitigate its losses, or even showed improvement in its crucial segments. These include Baidu’s Core (search engine/ad revenue/marketing) segment as well as the company’s sometimes overlooked AI Cloud business.

At the end of the day, it’s fine to be concerned about China-based businesses due to security crackdowns and the COVID-19 pandemic’s resurgence. This doesn’t mean that you have to shun a perfectly viable investment opportunity in a top-tier tech giant like Baidu.

On TipRanks, Baidu’s key metrics have resulted in a Smart Score of 10, indicating that the stock is capable of outperforming the broader market.

A Wide Range of Applications

First things first: Baidu bulls should definitely target $200 as the stock’s 52-week high is $209.17. Recently, the share price hovered near $140. Value-focused investors can find a good deal here, as Baidu’s trailing 12-month P/E ratio of 32.53 is certainly not unreasonable.

Still, getting Baidu stock back into the $200s won’t be an easy task. Ultimately, investors will want to see evidence that Baidu is overcoming China’s challenges. In order to see the full picture, though, it’s important to understand Baidu’s business model.

In the U.S., some traders might operate under the impression that Baidu is basically just a popular Chinese search engine provider. Now, it’s true that search engine ad revenue and marketing are a major part of Baidu’s business model, but there’s more to the story.

Much of Baidu’s revenue is also derived from the company’s AI Cloud segment. In a conference call, Baidu co-founder and CEO Robin Li observed that, through the company’s AI Cloud business, Baidu has “built a wide range of AI-powered applications and tools that can generate more replicable and scalable AI solutions in industries such as the public service sector, energy and utilities, healthcare as well as transportation.”

Baidu even used AI to build a smart city, together with China’s Lijiang municipality, to help “improve the city’s safety, efficiency, convenience, and environmental quality.” Li also discussed the implications of Baidu’s forays into intelligent driving and smart connectivity.

Thus, Baidu’s technology clearly has a broad range of applications, beyond the company’s reputation for being a search engine provider. Is the company’s multifaceted business profitable, though?

Remaining Confident

Make no mistake about it: Baidu’s CEO is well aware of the challenges involved with doing business in China. Li acknowledged that since mid-March, Baidu’s business “has been negatively impacted by the recent COVID-19 resurgence in China” and “challenges related to the virus continue to pressure our near term business operations.”

Nevertheless, Li remains “confident” and the CEO seems to attribute this optimism to Baidu’s AI businesses. Indeed, Li posits that the company’s AI businesses will “boost the long-term growth of Baidu and contribute to China’s innovation-driven economy and sustainable development.”

Li’s confidence is supported by Baidu’s first-quarter 2022 financial data. CFO Rong Luo reported that Baidu Core’s non-ad revenue increased 35% year-over-year, while the company’s AI Cloud revenue grew by a very healthy 45%.

Taking a broader look, Baidu’s total quarterly revenue increased by a modest 1% to 28.41 billion yuan (roughly equivalent to US$4.22 billion). While noting that this result beat Wall Street’s estimate 27.9 billion yuan, Citi (C) analysts described Baidu’s quarterly revenue total as “solid and better than feared.”

With that, the Citi analysts maintained a Buy rating on Baidu stock and even issued a price target of $223, implying considerable upside from the current share price and a powerful break from the $200 level.

Granted, not every analyst is as optimistic as the Citi analysts. Nomura analysts observed Baidu’s better-than-expected results, but they nonetheless maintained a Neutral rating on Baidu stock and issued a modest $139 price target.

Just maybe, the final result will be a middle ground between Citi’s $223 and Nomura’s $139. Even if Baidu stock manages to get to $175, that could be the tipping point toward an eventual full recovery.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, BIDU is a Strong Buy, based on 10 Buy and three Hold ratings. The average Baidu price target is $213.44, implying 47.2% upside potential from early Wednesday price levels.

The Takeaway

Overall, it’s a good idea to be cautious if you’re investing in Chinese businesses today. You’ll definitely want to be choosy and check each company’s financial stats before taking a position.

Baidu, in particular, appears to be making solid progress despite China’s challenges. Moreover, the company is demonstrating that it’s much more than a search engine provider, and that its AI/cloud applications can be far-reaching.

Therefore, don’t hesitate to consider a long position in Baidu stock. There’s no reason why it shouldn’t revisit $175 and even $200 sooner or later.

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