To The Moon

Q4 Performance review

Baidu 22Q4: Revenue 33.1 billion yuan (YoY+0%) surpass consensus by 3.2%, Baidu's core revenue 25.7 billion yuan (YoY-1%) exceeded consensus by 2.3%; Non-GAAP's EBIT 5.4 billion yuan, surpass consensus by 12%.

Iqiyi 22Q4: Revenue of 7.59 billion yuan (YoY+2. 8%) surpass consensus of 75 billion yuan; Member service revenue of 4.7 billion yuan (YoY+15%) and advertising revenue of 1.55 billion yuan (YoY-7%) beat market consensus of 1.39 billion yuan; Non-GAAP EBIT 978 million yuan (Margin 13%) higher than the market consensus of 499 million yuan;

Investment Highlights

Baidu and $iQiyi Inc.(IQ)$ Q4 performed better than expected, with the assistance of ads demand recovery.

In Q4, Baidu's core advertising business revenue (25.65 b vs 25.94 b consensus) and iQiyi's advertising business revenue (1.55b vs 1.39b consensus) , both beat market consensus.

To put it another way, the YoY growth rate of Baidu's core business is 4%, more than twice beyond market expectation. Same to iQiy, its advertising business revenue (1.55B) still declined year on year, but exceeded the market expectation (1.39 B) by 11%.

Advertising business is mature, estimates are mostly conservative, especially in 2022. A surprise means more than others.

iQiyi also reduce cost effectively. Although the subscription volume may have encountered bottlenecks, we should pay more attention to increasing revenue and reducing expenditure, on the one hand, reducing costs and on the other hand, raising prices. The return of Q4 free cash flow is a good start. See Would iQiyi be the next Netflix in Stock Market?

2023 Expectation

The recovery of economic activities after the pandemic exceeds expectations, makes recovery of advertising business more exciting. The whole income level in 2023 should be raised, and advertising is a high-profit business. Coupled with marginal effect, the profit raised through operational leverage should be more considerable.

One of Baidu's most imaginative project, "Ernie Bot", a big language model like ChatGPT, will also be launched in March. It will be applied to Baidu search first, and will be fully connected to Baidu AI Cloud in the future.

We are maintaining our BUY rating and $185 PT (unchanged) after BIDU beat 4Q estimates, with 1Q outlook better than expected. BIDU Revenue for 23Q1 may increase by 6%, gross profit increases by 6%, and earnings before interest and tax increased by 11%. 

We are maintaining our HOLD rating but increasing PT to $7.5 (was $5). IQ's 4Q results beat estimates, with 1Q outlook implying another quarter of strong sub adds, thanks to the recent original blockbusters. Revenue for IQ 23Q1 is expected to increase by 6%, gross profit by 13% and earnings before interest and tax by 126 basis points.

About Stock Price Volatility

Market conditions may depend on many factors, but more on expection of investors. The reasons for Baidu and iQiyi's high volatility in the earnings day may as follows:

1. Longs Profit taking. Judging from the performance this year, $Baidu(BIDU)$ (+19.88%);  $TENCENT(00700)$ (+12.41%); $Alibaba(BABA)$ (+7.41%) , BIDU is the top gainer among Chinese stocks. As market already started to price-in AI, there may be longs to take profits.

2. Quantitative trading.Trading on the day of financial report was active, large number of quantitative trading orders were triggered, causing a chain reaction in the market. The largest number of orders on February 22nd came from liquidity service providers, while institutional orders not that active. For institutions, the investment decision would be longer, and they may not only respond to financial reports.

3. Market risk-off mode. U.S. stock market was sensitive yesterday, Yield has been continuing to rise. The market is worried about further interest rate hikes.