Baidu (NASDAQ:BIDU), the Chinese language tech large that owns the nation’s high search engine, lately posted first-quarter numbers that topped analysts’ expectations. Its income rose 25% yr over yr to twenty-eight.1 billion yuan ($4.3 billion), beating estimates by 980 million yuan.
Its adjusted internet earnings elevated 39% to 4.3 billion yuan ($656 million), or 12.38 yuan per ADS — which beat expectations by 1.63 yuan. Its adjusted EBITDA greater than doubled to five.9 billion yuan ($901 million).
Baidu expects its income to rise 14%-25% yr over yr within the second quarter. That forecast does not embrace any potential good points from its deliberate buy of JOYY‘s reside streaming platform, YY Dwell.
These numbers recommend that brighter days are forward for Baidu after two years of sluggish progress. However is it price shopping for proper now because the market rotates from progress to worth shares?
Has Baidu mounted its largest downside?
Baidu generated 64% of its income from its on-line advertising enterprise through the quarter. The phase’s income rose 27% yr over yr, breaking its seven-quarter streak of consecutive declines.
Over these two years, the web advertising enterprise — which generates most of its income from advertisements and managed enterprise pages — struggled with the financial slowdown in China, competitors from different advert platforms, and the pandemic’s influence on sure sectors.
Baidu’s search engine additionally confronted fierce competitors from newer platforms like Tencent‘s (OTC:TCEHY) WeChat and ByteDance‘s Douyin (often known as TikTok abroad), which each added inner engines like google to their apps.
The web advertising enterprise confronted a straightforward comparability to its 19% year-over-year income decline through the pandemic a yr in the past. However the growth of its cellular app, the expansion of its managed pages, and the rising adoption of its Advertising Cloud — which gives corporations a set of cloud-based promoting instruments — strengthened the enterprise and decreased its dependence on conventional advertisements.
In the course of the quarter, Baidu generated 35% of its core on-line advertising income from its managed web page enterprise, which maintains its shoppers’ enterprise web sites, in comparison with simply 21% a yr earlier. About 80% of its advertisers are additionally now locked into its Advertising Cloud, whereas its CPM (the quantity an advertiser pays for 1,000 views) rose by double-digit percentages.
These enhancements, together with Baidu’s robust steerage for the second quarter, point out its promoting enterprise is making a comeback. It additionally means that extra corporations are constructing their on-line presences with Baidu’s managed web page and advertising cloud companies, which makes it extra of a one-stop-shop for digitizing a enterprise than a conventional search-based advertiser.
A protracted-term growth past advertisements
In the course of the conference call, Baidu CEO Robin Li claimed the expansion of the corporate’s “non-advertising income might presumably exceed promoting income inside Baidu Core within the subsequent three years.”
That is a daring declare since Baidu’s non-marketing income solely accounted for 15% of its high line through the first quarter. Nonetheless, that income rose 70% yr over yr to 4.2 billion yuan ($646 million).
Most of that income got here from Baidu’s AI Cloud, which grew its high line 55% yr over yr to 2.8 billion yuan ($440 million). That progress is spectacular, however Canalys estimates Baidu solely controls about 8% of China’s cloud platform market — placing it in fourth place behind Alibaba (NYSE:BABA), Huawei, and Tencent. It is also probably unprofitable since even Alibaba cannot squeeze out GAAP profits from its cloud platform but.
Nonetheless, Baidu’s AI Cloud additionally serves as a agency basis for its different cloud-based companies, together with its Apollo software program platform, robotaxis, electric vehicles, and digital mapping companies. Baidu mentioned its income from its Clever Driving and OGI (different progress initiatives) division “grew quickly” as its fledgling Apollo Self Driving platform expanded fivefold from a yr in the past.
All these strikes complement the growth of Baidu’s ecosystem, which additionally consists of its cellular app’s Good Mini Applications, its DuerOS voice assistant, its BJH platform for content material creators, and its upcoming takeover of YY Dwell’s streaming movies.
If Baidu’s income from these newer companies finally exceeds its promoting income, it could possibly be higher insulated from financial downturns and compete extra successfully in opposition to Tencent and Alibaba.
iQiyi stays a weak hyperlink
Lastly, iQiyi (NASDAQ:IQ), the video platform Baidu nonetheless owns a majority stake in, stabilized after a number of quarters of weak growth. Its income rose 4% yr over yr to eight.0 billion yuan ($1.2 billion), or 28% of Baidu’s high line, but it surely stays deeply unprofitable.
Baidu reportedly tried to promote iQiyi to Tencent and Alibaba final yr, however these talks fizzled out after the Chinese language authorities began to scrutinize the nation’s high tech corporations. Promoting iQiyi would nonetheless streamline Baidu’s enterprise, however that deal in all probability will not occur anytime quickly.
The underside line
Analysts count on Baidu’s income and earnings to develop 20% and 3%, respectively, this yr. Its promoting enterprise will probably continue to grow all year long, however larger investments and a rising dependence on lower-margin companies might crush its earnings.
That outlook appears combined, however Baidu’s inventory remains to be extremely low cost at 15 occasions ahead earnings. That low valuation makes it a worthy funding, particularly if it continues to monetize its cloud, AI, and driverless companies.
This text represents the opinion of the author, who might disagree with the “official” advice place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even one among our personal — helps us all suppose critically about investing and make selections that assist us grow to be smarter, happier, and richer.
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