To The Moon

Top AI stock pick [By Edmund Chan: CIO of Tiger Fund Management] Here’s a thought experiment. Will you invest in a company that is: A combination of “Google” + “Azure/AWS” + “Tesla” + “OpenAI” + “Netflix” Operates in the second largest economy in the world Trades at 13x P/E and 13% EPS growth If your answer is a resounding “Yes”, Baidu $Baidu(BIDU)$ will be one of your top stock picks. The share price of Chinese companies has experienced a severe downturn in the past 3 years. The market cap of Alibaba has crashed 75% from its peak of $840 billion. While this is a lamentable state of affairs for some, I believe this is an excellent opportunity to invest into Chinese companies. In this space, my top pick is Baidu (@$122.85; 31/05 Close). And I will make a bold statement here: Baidu will be bigger than Alibaba by 2030 Baidu currently has a market cap of $43 billion, about a fifth of Alibaba. However, its AI ambition is miles ahead of Alibaba and other Chinese companies. The market has recognised this. Since November last year (when OpenAI released ChatGPT 3.5), Baidu has outperformed Alibaba by 22.3% within half a year. Hence, I believe that Baidu could be bigger than Alibaba in the future if it executes AI ambition well. Here are my insights: Overview of Baidu Baidu's AI Ambition: A Glimpse into the Future Artificial Intelligence Pioneer in China Baidu's Autonomous Driving: Unveiling the Potential **Warning: This is a lengthy 100-point post (trying to do a pun on Baidu’s Chinese name).** Overview of Baidu Baidu is cash-rich, with a net cash position that is a third of its equity. It generates around $3.5 billion in Free Cash Flow annually, translating into an enticing 8% FCF yield. Using a Sum of the Parts (SOTP) analysis, Baidu’s Core Search business accounts for around half of its valuation. It reigns over the search engine market in China, boasting a commanding market share of over 70%. In another words, Baidu is the Chinese equivalent to Google. The bedrock of Baidu's success lies in its Core Search business with a remarkable EBITDA margin of 30%. The main driver is advertising revenue. In 1Q2023, Baidu reported earnings that surpassed expectations, driven by a surge in advertising expenditures, particularly in the travel, healthcare, and business services sectors. Baidu’s stake in iQiyi (China's Netflix) and Trip.com, together with its net cash position, forms a fifth of the company’s valuation. The remaining third of Baidu’s valuation comes from its Artificial Intelligence-related business (“AI business”). Baidu's AI Ambition: A Glimpse into the Future As an AI-enthusiast, I “fell in love” with the AI ambition of Baidu. So, allow me to delve deeper into this facet of Baidu. Baidu's AI business encompasses its AI stack, AI Cloud, and autonomous driving capabilities. While the business currently operates at a loss at around $1.8 billion, Baidu's strategic focus on expanding its scale and user base is expected to alleviate these losses. Encouragingly, in 1Q2023, AI Cloud achieved profitability on a non-GAAP operating level, signaling a positive trajectory for Baidu's AI operations. In my assessment, I currently value Baidu's AI business at $22 billion, using a conservative price-to-sales (P/S) ratio of 4.5x based on a $5 billion revenue. However, the true potential lies in the successful execution of Baidu's grand AI plans, which could catalyze exponential revenue growth. In a blue-sky scenario, I envision Baidu's AI business generating revenues of $25 billion, representing a significant leap forward. Applying a higher P/S multiple of 10x, the value of Baidu's AI business could skyrocket to a staggering $250 billion. Such a transformation would position Baidu to be bigger than Alibaba. Baidu's AI ambitions has immense potential of Baidu. Hence, my blog post is focused mainly on this aspect for Baidu. Artificial Intelligence Pioneer in China Baidu is a pioneer in the field of AI in China. In 2014, the arrival of Andrew Ng, co-founder of Google Brain, marked a significant turning point for its AI capabilities. Ng played a pivotal role in developing Baidu's AI capabilities during its early years, resulting in the establishment of deep AI expertise. Baidu's AI prowess is multifaceted, but I will focus on two key aspects: Baidu Brain Bernie Bot Baidu Brain Baidu Brain serves as the foundation of Baidu's AI infrastructure and made its debut in 2016. This powerful technology underpins all of Baidu's businesses while simultaneously opening doors for third-party developers to accelerate the widespread implementation of AI. Baidu Brain operates across four layers and incorporates one module, each contributing to the company's best-in-class AI stack: The "foundation" layer encompasses PaddlePaddle as the software, Kunlun AI processors as the hardware, and robust databases as the driving force. The "perception" layer amalgamates Baidu's home-grown algorithms in voice technology, computer vision, and augmented reality/virtual reality. The "cognition" layer actively acquires and integrates new information into Baidu's expansive knowledge graph. The "platform" layer fosters a flourishing AI ecosystem. An additional "AI security" module ensures the utmost security, safety, and privacy within Baidu Brain. By expertly harmonizing these layers, Baidu demonstrates its determination to deliver cutting-edge AI solutions. Such comprehensive capabilities have propelled the company to become one of the leading AI company in China. ERNIE Bot I was not surprised when Baidu unveiled its ERNIE Bot earlier this year. In fact, the ERNIE model had been in development since 2019, with regular upgrades each year, showcasing Baidu's commitment to AI. ERNIE Bot is still inferior compared to ChatGPT. But, it is still early days. At least, ERNIE is ahead of its peers in China. Also, ERNIE Bot can help write books, as well as define a traditional Chinese idiom and write a poem, and help generate multi-modals. The initial phase of ERNIE Bot is targeted towards enterprise users. Here, ERNIE Bot offers a gateway to integrate generative AI capabilities into their operational processes as well as their products and services. The level of anticipation for ERNIE Bot was evident as more than 650 enterprises expressed their desire to join the ERNIE ecosystem even before its official release. As ERNIE Bot engages with more users, its deep learning capabilities are expected to improve over time, unlocking further potential for Baidu. Baidu envisions multiple revenue streams stemming from the deployment of ERNIE Bot, which includes pay-per-use API Integration, AI Cloud subscription services and private cloud deployment. Baidu's Autonomous Driving: Unveiling the Potential Baidu has made significant strides in autonomous driving. I will highlight 3 aspects: Apollo: A Driving Force Robotaxis: Redefining Urban Mobility Jidu: Excellence in autonomous driving Apollo: A Driving Force Baidu offers Level 4 self-driving autonomous vehicles called Apollo. This is an in-car AI operating system that combines cameras, radar and lidar. It is different from other operating system in that this is an open content and service ecosystem that is a significant milestone in the industry. In another words, Apollo is the Android-equivalent in smartphones or Windows-equivalent in personal computer. Robotaxi: Redefining Urban Mobility Baidu has set its sights on creating the world's largest fully driverless taxi network. Under Apollo Go, Baidu has ventured into fully driverless robotaxis within China. Currently available in Wuhan, Chongqing, and Beijing, Baidu's robotaxi service has captured the imagination of commuters seeking an efficient mode of transportation. Notably, Beijing stands as the latest addition to Baidu's growing robotaxi fleet. Since its introduction in March, these autonomous vehicles have been navigating certain areas in Beijing without the need for human drivers. In Wuhan, where approximately 100 fully driverless taxis are in operation, the reception has been remarkable. During peak hours, each vehicle receives an average of 20 orders per day, reflecting demand levels on par with traditional taxis. In 1Q2023, the Apollo Go service witnessed a staggering 236% growth, delivering approximately 660,000 rides—an impressive testament to the increasing adoption of this cutting-edge technology. It has also achieved high user satisfaction with the Apollo Go app's impressive 4.9 out of 5-star rating. In fact, over 94% of users have bestowed the highest rating of 5 stars, underscoring the enjoyable experience of Robotaxis. In the US, robotaxis has started to gain traction. Just last month, GM-owned Cruise unveiled its autonomous robotaxi service, offering rides around the clock in the bustling city of San Francisco. While currently limited to select areas and available to the general public during nighttime hours, this bold move heralds the arrival of a new era in urban transportation. The rapid evolution of autonomous driving has brought us to a point where the prospect of summoning a robotaxi at any time holds great promise for urban dwellers. Imagine Baidu successfully providing robotaxi services to over 1 billion people in China. This will be a game changer for the company! Jidu: Excellence in autonomous driving Last year, Baidu and Geely committed to a $400 million investment to their electric car venture, Jidu Auto. Geely will provide the essential hardware capabilities, while Baidu contributes its autonomous driving functions and connectivity software. Jidu Auto envisions its vehicle models as the epitome of next-generation robot cars, promising a glimpse into the future of automotive transportation. Last June, Jidu unveiled its inaugural concept car, the ROBO-01. This electric SUV boasts two electric drives, generating a combined power of 400 kW, with a total range of 600 km. Scheduled deliveries of the ROBO-01 are set to commence this year, marking a momentous achievement for the company. The ROBO-01's design features are nothing short of futuristic, with highlights including a U-shaped folding steering wheel, 3D borderless integrated ultra-clear screen, 3D human-machine co-driving map, full-scene voice inside and outside the car, millisecond voice response and offline intelligent voice assistant. Accompanying the SUV model is the eagerly anticipated ROBO-02, an electric sedan that forsakes traditional door handles in favor of voice command or smartphone-controlled door opening through Bluetooth connectivity. While detailed specifications for the ROBO-02 remain under wraps, more information is expected to be unveiled later this year. As Jidu Auto reveals an expanding lineup of electric vehicles, each equipped with cutting-edge autonomous driving capabilities, the stock market may develop a keen interest in Baidu. This could be a potential catalyst for the share price re-rating of Baidu as investors recognize the company's significant strides in the realm of futuristic mobility. Conclusion This is a really long post. But, let me just go back to my thought experiment in my introduction. Baidu is a “best of breed” combination of the best AI companies in the world. Executing these AI plans could make them to be one of the most valuable companies in China. This could make it a much bigger company than Alibaba by 2030. [This article first appeared at https://edxcapital.substack.com/ on 1st June 2023]