To The Moon

Baidu (NASDAQ:BIDU), also known as China's Google, is one of the world's most underappreciated and undervalued companies. Can you believe that China's leading search engine provider with numerous promising businesses under its umbrella has amarketcap of only $32 billion? Yes, it's true.Baidu's stock has crashed over the last two years due to the economic slowdown and other transitory effects. The company's rock-bottom valuation and future growth prospects make Baidu a top stock for the next 5-10 Years.

BIDU(StockCharts.com)

The peak-to-trough decline has been nothing short of epic, with Baidu's stock dropping by a staggering 80% from its top. The stock even dipped below $80 recently, hitting its lowest point since 2010. However, Baidu remains an incredibly resilient innovative company with significant growth prospects and excellent profitability potential. Moreover, Baidu's valuation is dirt cheap right now at about 9-10 times forward earnings estimates. As the economic slowdown concludes, uncertainties will fade, sentiment should improve, and Baidu's stock will probably move significantly higher.

Baidu Rules: Search Engine Market Share in China

Search engine market share China(marketmechina.com)

Baidu controls a significant portion of China's giant search market. It's important to consider that China has around 1.4 billion people, and more than a billion use the internet now. Therefore, 84% of the "all platforms" search mark is significant, and Baidu boasts an even more impressive 94% market share in the growing mobile segment. We're seeing a slight lag in desktop search as Bing, Sogou, and others have gained a minor market share. Nevertheless, Baidu remains the dominant force in China's search engine market and should continue to dominate.

Therefore, we should see search revenues continue powering growth, and sales growth should accelerate as the economic slowdown concludes and businesses expand ad spending revenues again. Also, Baidu is much more than a search engine. The company's mobile ecosystem consists ofmore than a dozen apps. Moreover, Baidu offers a full suite of cloud services and solutions through its Baidu AI business. Additionally, the company's leading position in AI enables Baidu to participate in intelligent driving and many other exciting growth initiatives.

Baidu AI Cloud: A Leading Player

China cloud market share(chinainternetwatch.com )

Baidu has the fourth largest cloud business in China and owns around 9-10% of the lucrative cloud market. Again, China is a massive market with more than one billion internet users, and Baidu AI Cloud has plenty of growth ahead.

Driverless AI Opportunity

Baidu's more significant untapped opportunity is likely in the driverless AI sector. The internet gianthas secured permitsto provide driverless service in Beijing. The company is deploying its driverless RT6 vehicles and plans on branching out large scale in 2024. Baidu plans to expand its ride-hailing service to 65 cities by 2025 and 100 cities by 2030. It already covers more than ten cities across China, including Beijing, Shanghai, Shenzhen, Chongqing, and Hefei.

iQIYI: Still Baidu's

While Baidu spun off its iQIYI (IQ) unit, the company retains a50.57% majority ownership stake. iQIYI is a massive content provider in China, akin to Netflix (NFLX) and YouTube in one platform service. iQIYI has approximately100 million paid subscribersand more than500 million active monthly accounts. While this segment remains unprofitable, monetization has improved. This segment should continue providing revenue and EPS growth as Baidu advances.

Revenue Breakdown

Baidu revenues %(businessquant.com )

While iQIYI accounted for only about 22.5% of total revenues last quarter, we should see revenue expansion in the iQIYI space as monetization improves in future years. iQIYI shouldreturn to profitability next year, and the segment appears dramatically undervalued. iQIYI generated nearly $1 billion in revenues last quarter, and the company should report approximately $4 billion in sales this year. The business is very cheap, provided that iQIYI's market cap has dropped to just $2.3 billion. Improvement in iQIYI's valuation should enable Baidu's valuation to increase in the coming years.

Baidu: Another Solid Earnings Announcement

Baidu's recent earnings of$2.37 per sharebeat the street's estimate by 17 cents. Moreover, revenues came in at$4.57 billion, beating the forecast by$100 million. Non-GAAP Baidu Core operating income was$935 million, and non-GAAP Baidu Core operating margin came in at 26%. Adjusted EBITDA was$1.25 billion, and the adjusted EBITDA margin came in at 27%.

Baidu's Valuation: At a Rock Bottom

EPS surprise and estimates(SeekingAlpha.com )

Despite the stagnating economy, Baidu has outperformed EPS estimates in its last four quarters. Baidu reported $8.15 in its TTM, equating to a TTM P/E ratio of about 11.6. Consensus estimates were for just $6.06 in EPS, illustrating massive 35% outperformance over the consensus estimates. This dynamic implies that Baidu could continue surpassing analysts' depressed EPS estimates as the company advances in future years.

For full-year 2023, consensus EPS estimates are in the$9-10 range, but even if we see modest (10-15%) outperformance over the forecast, Baidu's EPS could come in at about $10-11 next year. This dynamic implies that Baidu is now trading below ten on a forward P/E basis.

Growth Should Accelerate 

Revenue Estimates

Revenue growth(SeekingAlpha.com )

Due to the challenging economic atmosphere and other transitory factors, Baidu's revenues will likely decline close to 12% YoY. However, this period should mark a low point and a bottom in Baidu's revenues. Also, despite the revenue drop, Baidu has illustrated remarkable resilience on the earnings front, with EPS likely to come in about flat over last year. After this low point period, we should see revenue growth return to 13-17% in future years. Also, earnings growth should improve, and we could see 15-25% EPS growth as the company advances.

EPS Estimates

EPS estimates(SeekingAlpha.com)

Analysts anticipate EPS to be around $13 in 2025. However, provided Baidu's growth possibilities, earnings potential, and the company's tenacity to outperform projected results, we could see EPS of about $15 by 2025. This dynamic implies that Baidu could now be trading at nearly six times forward (2025) EPS estimates. We can look at Baidu's valuation on a P/S basis. The company's market cap is only around $32 billion, and with projected sales of approximately $20 billion next year, Baidu's forward P/S valuation is only 1.5 times sales now.

What Wall St. Expects

Price targets(SeekingAlpha.com)

The average one-year price target on the street is around $170, implying a 78% upside from the current price. The higher-end price targets go up to about $260, suggesting a possible 175% appreciation over the next year. We see a high probability that Baidu's shares can go much higher over the next twelve months and in future years.

What Baidu's financials could look like in the coming years:

Source:The Financial Prophet

We see that provided a 13-17% revenue growth in future years, Baidu can reach around$50 billionin revenues by 2030. Also, applying a relatively modest 15-20% EPS growth rate, EPS can climb substantially as the company advances. Finally, using modest multiple expansion we see that Baidu's stock can go significantly higher in the coming years. An appreciation from $95 to $640 equates to a return of approximately 575%.

Risks to Baidu

While I remain committed to my bullish assessment, there are some risks that investors should consider before putting their money into Baidu. There are regulatory and political risks. For instance, the Chinese government could impose stricter guidelines relative to tech businesses in China, negatively impacting Baidu's shares. In addition, there's a chance of delisting from U.S. stock exchanges in a worse-case outcome. Finally, the company could underperform, not produce significant growth, and go down in history as a poor investment. The underlying risks are plausible, and investors should consider these and other risks carefully before buying into Baidu shares.