Baidu: China's AI And Robotaxi Leader Is In The Discount Bin

seekingalpha08-15

Baidu has been punished far too harshly.Little to no value is being assigned to AI and robotaxis here.While waiting, investors get downside protection from a massive cash pile.V2images Baidu (NASDAQ:...

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On the one hand, you have a challenged search business likely headed for near-term disappointments in next week's earnings. But then there's the basket of high-growth options, starting with artificial intelligence (or 'AI'), where Baidu retains a sizeable lead over the competition (see Baidu: Buy The AI Story Without Paying For It). Similarly, in autonomous driving, Baidu is at the cutting edge in China. On both counts, the current P&L contribution is admittedly immaterial today, but the long-term growth opportunity, if Baidu gets either right, could be immense. The best part about Baidu's investment case, though, is that investors really don't have to underwrite very much success at all. Underpinning the value is Baidu's cash position, which, net of debt, equates to nearly 70% of its market capitalization. Ex-net cash, the stock is effectively priced below 3x next year's consensus earnings per share (or ~7x unadjusted) - too steep a discount, in my view, for a company still on track for bottom-line growth. Heading into next week's Q2 report, the bar is low enough that even incremental positives on capital allocation (bigger buybacks) or structural growth (AI monetization and robotaxi progress), along with silver linings in ads (better H2 2024), could re-rate the stock. Data by YCharts Advertising Growth Slows… Baidu management spends a lot of time talking up its AI and robotaxi initiatives these days, but the lion's share of its profits is still advertising-based. As the company is primarily exposed to offline verticals that track the broader economy, growth has understandably decelerated alongside China's nominal GDP growth (now tracking in the low-single-digits % for 2024). Adding to the macro headwinds is the risk that competition from Tencent's (OTCPK:TCEHY) WeChat ecosystem and short video platforms like Douyin and Kuaishou (OTCPK:KUASF) continue eating into Baidu's share of ad spending. Reuters Balanced against these headwinds is Baidu's efforts to enhance its search offering with generative AI (a la Microsoft's (MSFT) 'new Bing'). Yes, there will be some cannibalization in the near term, given genAI content isn't monetized the way conventional search is. But if/when monetization kicks in, ads growth could well return to a 'GDP plus' pace - a scenario the market doesn't appear to be contemplating at all. As for the macro, China's gradual fiscal/monetary easing means a recovery will take time. With benchmark yields down to record lows after big rate cuts in Q3, though, I wouldn't rule out green shoots in the back half of this year. Bloomberg …But AI is on the Upswing Slower growth in ads is being partially offset, though, by Baidu's AI capabilities (reportedly on par with OpenAI's GPT-4). Not just in search, where ~11% of results now incorporate genAI in some form (per Q1 2024 commentary), or on the consumer side via Ernie Bot (the Chinese large language model leader at >200m users), but on enterprise use cases, where the path to monetization is a lot clearer. Think automating parts of the customer service/call center flow or real-time content censorship for media platforms. NBR It remains early days, but if cloud AI, Baidu's current growth focus, does indeed yield cost savings with its early partners, the long-term growth runway could surprise massively to the upside. Unlike its Western peers, though, Baidu is also a lot more constrained due to chip sanctions, so updates on AI capital needs and GPU inventory will be worth looking out for with Q2 reporting next week. …and the Robotaxi Opportunity is at Hand Also embedded within Baidu is Apollo Go, China's autonomous vehicle leader. For a while now, this unit had been written off as an 'out-of-the-money' option; but with Beijing coming out with a supportive policy draft for robotaxi commercialization last month, the upside here can no longer be ignored. Though it's too early to size the robotaxi opportunity in China, what is clear is that Baidu has a big first-mover advantage, having accumulated over 6m rides (mainly in tier-1 Chinese cities). And on the development front, there are unique opportunities to extend its lead, including via a tie-up with Tesla (TSLA). While currently limited to Baidu Maps and 3D navigation, there's clear room for this win-win partnership to expand a lot further down the line. In the meantime, navigating the tricky balance between development and cost will be a key monitorable in Q2. Near term, management has already outlined a path to narrowing losses for Apollo Go, for instance, by tapping into efficiencies on both the operating (30% reduction) and service costs (80% reduction). Baidu The key, though, will be scale, as the operating leverage (i.e., spreading more revenue over a fixed cost base) inherent in the robotaxi model is potentially massive. In this regard, progress updates in Wuhan, the city where Baidu has seen the most traction (>800k rides in Q1 2024 alone), present an early litmus test. Not just on fleet expansion, but also on the path to profitability, with current guidance already calling for break even in the city by year-end. Baidu China's AI and Robotaxi Leader is in the Discount Bin Baidu's core ads business isn't in the greatest shape, but the stock seems overly penalized at this point. Keep in mind that this remains China's clear leader in AI and robotaxis - two exciting growth areas with a lot of runway. While waiting, investors also get protection from a net cash position that has blown up to ~70% of Baidu's market cap and an ongoing ~$5bn buyback program. So even if we do get more ad-related disappointments in Q2 next week, the bar is low enough that any signs of a second-half recovery or incremental progress on robotaxis or AI could re-rate the stock quite significantly.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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