BUY Baidu (BIDU)
Baidu owns the largest search engine in China and mostly derives its income from online advertisements. With three key tactics, Baidu is attempting to restructure its business:
- To Decrease its online marketing segment's reliance on conventional search and display ads by increasing its managed business pages, thus better controlling its online presence.
- It is developing its mobile app into a super app that combines various "micro programs" with different functions, like WeChat. The Baidu app finished Q3 with 634 million MAUs, an increase of 5% from a year earlier, demonstrating the success of that expansion.
However, WeChat, a Tencent "super app," which combines mobile chats, a social network, digital payments, internet searches, and other services for its 1.31 billion monthly active users, has battled Baidu over the past few years (MAUs). Additionally, consumers started their product searches on leading e-commerce websites rather than Baidu. At the same time, short-form video platforms like ByteDance's Douyin (commonly known as TikTok outside of China) attracted users and marketers away from Baidu.
The growth of its "non-online marketing" revenue is also driven by the company's expansion of its cloud platform, Baidu AI Cloud. According to Canalys, Baidu AI Cloud only held 9% of the Chinese cloud market in the second quarter of 2022, placing it in a distant fourth place behind Tencent Cloud, Huawei Cloud, and Alibaba Cloud.
Moreover, Douyin and other comparable heritage streaming video services like Tencent Video and Alibaba's Youku Tudou struggled to catch up with Baidu's streaming video subsidiary iQiyi, which makes money from commercials and paid subscriptions. In addition to these issues with competition, the Chinese economy's slowdown and the unpredictable COVID-19 lockdowns put a strain on both iQiyi and Baidu's primary search engine.
Analysts predict Baidu's revenue will remain unchanged this year but will increase in 2023. Baidu trades at nearly 14 times the projected earnings for the following year, and following China's easing regulatory scrutiny and attractive valuation, $BIDU is a buy.