Baidu Q3 2024 Review: The Good, The Bad, And The Ugly

seekingalpha11-22 21:30

With Baidu reporting a double miss for Q3 2024, BIDU stock has dipped by ~6% to a multi-year support zone in the low $80s.In Q3, Baidu's AI Cloud and Apollo Go businesses made tremendous progress, but...

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Baidu's ongoing Search transformation is hurting monetization The revenue decline here looks ugly, but we did expect short-term pain to persist for multiple quarters:  While macro-induced demand weakness for digital ads is undoubtedly an issue here, Baidu renovating its traditional Search b","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"IE00B0JY6N72.USD":"PINEBRIDGE GLOBAL EMERGING MARKETS FOCUS EQUITY \"A\" (USD) ACC","LU0640798160.USD":"EASTSPRING INVESTMENTS GLOBAL EMERGING MARKET DYNAMIC \"A\" (USD) ACC","LU1115378108.SGD":"Eastspring Investments - Global Emerging Markets Dynamic AS SGD","BK4531":"中概回港概念","BK4585":"ETF&股票定投概念","BK4587":"ChatGPT概念","BK4535":"淡马锡持仓","LU0287142896.SGD":"Fidelity China Focus A-SGD","BK4077":"互动媒体与服务","BK4579":"人工智能","BK4526":"热门中概股","BK4588":"碎股","BAIDF":"Baidu, Inc.","BK4552":"Archegos爆仓风波概念","BK4548":"巴美列捷福持仓","BK4574":"无人驾驶","LU0173614495.USD":"富达中国焦点A","LU0359201612.USD":"贝莱德中国基金A2","LU0359202008.SGD":"Blackrock China Fund A2 SGD-H","LU1023057109.AUD":"BGF CHINA \"A2\" (AUDHDG) ACC","BIDU":"百度","BK4504":"桥水持仓","BK4514":"搜索引擎"},"translate_title":"百度2024年第三季度评论：好的、坏的和丑陋的","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"BIDU":0.9,"BAIDF":0.9},"content_text":"With Baidu reporting a double miss for Q3 2024, BIDU stock has dipped by ~6% to a multi-year support zone in the low $80s.In Q3, Baidu's AI Cloud and Apollo Go businesses made tremendous progress, but online marketing revenue shrunk -4% y/y amid headwinds from macroeconomic factors and \"Search\" renovation.Baidu's long-term prospects are strong, with significant advancements in AI and autonomous driving, supported by a robust balance sheet and potential for substantial future growth.TQI's fair value estimate for Baidu has been adjusted to ~$175 per share. However, with a potential 5-year CAGR of ~32%, BIDU remains a highly asymmetric risk/reward opportunity.   zorazhuang  Introduction After initiating coverage on Baidu, Inc. (NASDAQ:BIDU) (OTC:BAIDF) with a \"Strong Buy\" rating in early-July, I reiterated my bullish view on the Chinese tech giant in light of a mediocre Q2 2024 print:   Baidu's latest quarterly report showed mixed performance, but underlying fundamentals are improving, with significant advancements in AI and autonomous driving technologies. Despite near-term challenges, Baidu's AI Cloud and Apollo Go businesses are poised to drive healthy growth at the Chinese tech conglomerate over the coming years. Baidu stock remains a \"Strong Buy\" at current levels due to its leadership in AI, depressed valuation, and robust free cash flow generation. With a fair value estimate of ~$199 per share and a potential 5-year CAGR of ~35%, Baidu presents an asymmetric risk/reward opportunity at a dollar-for-dollar valuation.  Source: Baidu: Be Greedy When Others Are Fearful    Author's Coverage On Baidu (SeekingAlpha) While Baidu's stock quickly surged into the triple digits - buoyed by China's monetary and fiscal stimulus announcements - BIDU has completely reversed all of its recent gains, and is now, re-testing multi-year support at ~$80 per share after reporting poor numbers for Q3 2024.   WeBull Desktop In today's note, we will dissect Baidu's latest quarterly report and re-run BIDU through TQI's Valuation Model to reach an informed investment decision on the stock. Analyzing Baidu's Q3 2024 Numbers For Q3 2024, Baidu reported underwhelming top and bottom line numbers, with revenues of $4.78B [-3% y/y] and non-GAAP EPS of $2.37 falling short of consensus estimates of ~$4.85B and $2.53 per share.   Baidu Investor Relations While Baidu's AI Cloud business drove healthy +12% y/y growth in non-online marketing revenue to $1.10B, a -4% y/y contraction to $2.68B in online marketing revenue meant that Baidu Core revenue was flat y/y! Now, the weakness in online market revenue is two-pronged - 1. A weak consumption environment in China is still hurting ad spend, and 2. Baidu's ongoing Search transformation is hurting monetization The revenue decline here looks ugly, but we did expect short-term pain to persist for multiple quarters:  While macro-induced demand weakness for digital ads is undoubtedly an issue here, Baidu renovating its traditional Search business by integrating ERNIE-powered GenAI into its core offerings is exacerbating the near-term pain. According to Baidu's management, 18% of all search queries in Q2 were answered by generative AI. Given the better accuracy and directness of generated results, the number of search queries on Baidu is decreasing, thereby creating monetization headwinds for the \"Google of China\". Since GenAI adoption in Search is still quite early, Baidu's online marketing revenues will likely stay under pressure in upcoming quarters. However, Baidu's management sees an opportunity to transition from the current CPS [cost-per-sale] model to a more lucrative CPC [cost-per-click] model in the GenAI era. By prioritizing user experience at the cost of monetization in the short term, Baidu's leadership is striving to secure its leadership position in Search for the long haul. And given its first-mover advantage in AI, as a long-term shareholder, I think Baidu's strategy is rational. Source: Baidu: Be Greedy When Others Are Fearful  The PBOC [China's central bank] has announced several monetary stimulus in recent weeks that are aimed at boosting consumption, and according to Baidu's management, we will need to wait for a consumption recovery to return the core ad business to positive growth once again:  Gary Yu, Morgan Stanley Analyst Hi, thank you for the opportunity to ask question. I have a macro-related question. Can management comment on the underlying ad demand trend? And also, have you seen any ad spend sentiment improvement, especially after the latest stimulus policy? And what's management's view on the macro outlook heading into 2025? Thank you. Rong Luo, Executive Vice President and Head of Baidu's Mobile Ecosystem Group [MEG]  Hi, Gary. Let me take your question. I think our advertising business is highly correlated to the macro environment, especially with offline small and medium enterprises across a wide range of industries, which make the majority of our net advertisers bases. As these small and medium enterprises are both deeply connected to the domestic consumption and highly sensitive to macro conditions, their vitality and recovery pace suffers, are more relevant indicators for our business. In Q3, we have seen the continued weakness across the verticals, such as the real asset franchising and healthcare. And so far in Q4, we have not observed a notable improvement in advertiser spending patterns, and the consumer spending remains subdued. And having said that, we are particularly encouraged by the strength and the timeliness of the recent stimulus policies, which continue to be rolled out as constructive initiatives we are seeing across the market. And while we think it will still take some time for these measures to reach offline small and medium enterprises and boost their confidence in advertising spending, we remain conservatively optimistic about the recovery trend ahead. We believe that once the macro environment improves and the domestic consumption can pick up, small and medium enterprises' confidence will quickly rebound. And Baidu has long been the primary platform of choices for these advertisers. With proven effectiveness in driving the customer acquisition and growth, we expect them to return for advertising spending, which can help us to drive meaningful recovery in the advertising business. With our intensive reach and unique value propositions to offline small and medium enterprises, we believe that our advertising business will rebound with strong recovery momentum once the market confidence comes back. Source: Baidu Q3 2024 Earnings Call Transcript   As a shareholder, I am disappointed about Baidu's revenue growth slipping back into the negative territory; however, progress in Baidu AI Cloud and Apollo Go (autonomous driving) is enough to stay the course through this transitionary period. During Q3, Baidu expanded its ERNIE family of GenAI models by adding two enhanced lightweight models and saw its PaddlePaddle and ERNIE developer community grow to 18.1M in November [up from 14.7M in Q2]. Furthermore, ERNIE's API calls are exploding higher! Yes, GenAI monetization potential is a significant unknown at this point, Baidu App's MAUs have grown to 704M [+6% y/y] as of Q3 - indicating positive user adoption.   Baidu Investor Relations Additionally, Apollo Go, Baidu's autonomous ride-hailing service, provided 988K rides in Q3 2024 [+20% y/y] and has started offering 100% fully driverless operations across multiple cities in China. With its sixth generation of autonomous vehicle - RT6 [expected cost under $30K per vehicle] now operating on public roads, Baidu's robotaxi business looks ready for primetime. A nationwide scale out will take time and capital; however, Baidu's management are open to asset-light avenues to accelerate this business:  Autonomous driving has a high bar. It requires best-in-class technical expertise, top talent as well as strong commitment to long-term investment and significant capital reserve. We have built an unparalleled foundation in all these areas, giving us a strong competitive edge and setting a high bar for others to follow. As one of the earliest players in the market, we've consistently demonstrated our unwavering commitment through over a decade of investment. This long-term dedication has fielded our technological advancements, positioning us as the global leader in autonomous driving technology. As mentioned earlier, Apollo Go hit a significant milestone of 8 million total rides, making us the world's top automating service provider. In addition to our cutting-edge technology and strong operational capabilities, we've achieved significant cost-effectiveness in hardware. RP6 stands out with a competitive price of under $30,000 for mass production, making it the most competitive option in the market. All the strengths just mentioned above are driving us forward, paving the way to validate our business model. The overall market is still in its infancy. So, competition should help accelerate the growth of the market and foster a more friendly, pro innovation regulatory environment. We believe such regulatory environment is essential for the healthy growth of the -- of this industry and we remain prepared for expansion when the time is right. Meanwhile, we are actively seeking new opportunities for international expansion. We see significant potential in cities that enable large-scale, fully driverless operations, similar to Wuhan, Chongqing. Additionally, we are open to exploring different business model options, focusing on asset-light strategy to keep our operations flexible and efficient as we grow. - Robin Li, Co-founder and CEO of Baidu  As of Q3 2024, Baidu remains a business in transition. While management realized enough operation efficiencies to maintain operating profits flat on a y/y basis, increased investments across the business are impacting Baidu's free cash flow generation. Fortunately, Baidu continues to boast a robust balance sheet that has ample firepower to weather it through this lean phase in its history - with ~$38B in cash, short-term and long-term investments, against ~$11B in short-term and long-term debt.   Baidu Investor Relations With Baidu's market capitalization sitting at ~$28.6B right now, Mr. Market is effectively pricing Baidu at a $1:$1 valuation right now, i.e., assigning zero value to its future FCF. Yes, Baidu is undergoing a painful transition right now, but it is still a massive cash generator with multiple growth vectors! Concluding Thoughts: Is BIDU Stock A Buy, Sell, Or Hold? On the back of its Q3 2024 report, Baidu's consensus estimate for 2024 revenue has downshifted to $18.55B [-0.8% y/y growth]. Furthermore, analysts are now projecting somewhat slower growth for the next three years. Given Baidu's ongoing \"Search\" renovation in a challenging macroeconomic backdrop, Baidu's business outlook for its core online marketing segment is highly uncertain, and through that lens, lowering future sales growth seems warranted. Now, I continue to believe that Baidu's (ERNIE-powered) AI Cloud and Apollo Go [autonomous robotaxi] businesses are set to serve as multi-year growth vectors for the Chinese tech conglomerate, but in the hunt for a margin of safety, I am lowering our 5-year CAGR sales growth rate assumption for Baidu from 7.5% to 5% in today's valuation exercise.   SeekingAlpha On the margin front, I am sticking with our optimized FCF margin assumption of 25%, despite the possibility of Baidu's near-term FCF margins slipping under this level due to temporary macroeconomic headwinds and increased investments across the business. All other assumptions are relatively straightforward, but if you have any thoughts, questions, and/or concerns, please share them in the comments section below. Here's my updated valuation model for Baidu:   TQI Valuation Model (Free to use at TQIG.org)  TQI Valuation Model (Free to use at TQIG.org) In light of Baidu's subdued Q3 report, TQI's fair value estimate for BIDU has decreased from ~$199 per share to ~$175 per share. That said, with Baidu stock trading in the low $80s, it remains grossly undervalued. Assuming an exit multiple of ~15x P/FCF (a discounted multiple to account for China's macroeconomic, geopolitical, and regulatory risks), I see Baidu's stock rising to ~$326 per share in the next 5 years at a CAGR of ~32%, which is much greater than our investment hurdle rate of 15%. Given Baidu's massive balance sheet floor, BIDU stock remains a truly asymmetric risk/reward investment at current levels. Key Takeaway: I reiterate Baidu Inc. as a \"Strong Buy\" in the low $80s. As always, thank you for reading, and happy investing. Please feel free to share any questions, concerns, or thoughts in the comments section below.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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