To The Moon

Chinese search engine behemoth $Baidu(BIDU)$ posted a stronger-than-expected set of Q4 FY’22 results last week as growth in the company’s cloud computing business helped to offset a slump in the bread and butter advertising operations. While Baidu’s online marketing business saw revenue decline 6% year-over-year to RMB 18.1 billion ($2.62 billion), due to the resurgence of Covid-19 in many Chinese cities and weaker spending by advertisers, non-online marketing revenue grew by 11% to RMB 7.6 billion ($1.10 billion) driven by the cloud businesses. That said, Baidu’s adjusted earnings per share rose 31% to RMB 15.25 ($2.21) driven largely by lower personnel and promotional costs with adjusted operating margins rising to 25% from 17% in the year-ago quarter. Baidu also appears to be making solid progress on the AI front. Baidu’s autonomous ride-hailing service, provided 561,000 rides in the quarter, up 162% year over year. The company also said that it would incorporate a chatbot service called “Ernie Bot” on the lines of OpenAI’s ChatGPT, across its offerings, starting with its search service in March. While Baidu stock declined a bit following the earnings release, it remains up by about 16% year-to-date and by about 70% from its 2022 lows, trading at about $132 per share. So is the stock still a buy at current levels? We believe it is. Baidu trades at just about 13.5x consensus 2023 earnings and about 12x consensus 2024 earnings. This is well below the nearly 40x multiple the company traded at around February 2021. Moreover, Baidu had a sizable net cash position of roughly $16 billion as of the end of Q4 2022, accounting for roughly 35% of the company’s current market cap. This means that the company’s 2023 P/E multiple, ex-cash would stand at a mere 8.5x, making the stock an even better value. Baidu’s growth, too, is likely to pick up this year, with China reopening its economy and ending stringent Covid-19 restrictions. Baidu also appears confident that its stock is undervalued, as it announced a new share repurchase program valued at $5 billion. We value Baidu stock at about $153 per share, which is 16% ahead of the market price. BIDU Return Compared With Trefis Multi-Strategy Portfolio