AI Cloud, Apollo Go And ERNIE Will Redefine Market Opportunities

Key Takeaways

• Baidu's AI Cloud growth and strategic AI integrations are enhancing revenue and improving margins through high-value services.
  
• Autonomous ride-hailing and AI-generated content offer untapped earnings and advertising potential to boost revenue streams globally.
  
• Baidu faces challenges in maintaining profitability and market share due to declines in marketing revenue, competitive pressures, and sensitivity to macroeconomic conditions.

Catalysts

Provides online marketing and non-marketing value added services through an internet platform in the People’s Republic of China.

• Baidu’s AI Cloud business is experiencing robust growth, with a year-over-year increase of 26%, which is expected to drive revenue growth due to increased demand for AI infrastructure and foundation models.
  
• The company’s strategic investments in AI, such as the integration of ERNIE into various business sectors like education and e-commerce, suggest expanding revenue streams and improving net margins from high-value services.
  
• Baidu's autonomous ride-hailing service, Apollo Go, shows potential for significant earnings growth as it expands globally, reinforced by a proven business model and 100% driverless operations in China that could lead to increased ride volumes.
  
• The transformation of Baidu's search technology with AI-generated content represents a large untapped monetization potential, which could enhance advertising revenue and improve overall margins once it is fully leveraged.
  
• Open sourcing the ERNIE 4.5 series and making the ERNIE bot free are strategic moves likely to boost user engagement and broaden market recognition, paving the way for diversified revenue growth from enterprise clients.

Baidu Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Baidu compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Baidu's revenue will grow by 6.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 17.4% today to 20.5% in 3 years time.
• The bullish analysts expect earnings to reach CN¥33.4 billion (and earnings per share of CN¥84.97) by about April 2028, up from CN¥23.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, up from 9.2x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 16.7x.
• Analysts expect the number of shares outstanding to decline by 1.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.45%, as per the Simply Wall St company report.

Baidu Future Earnings Per Share Growth

Risks

• Total revenues for the full year 2024 decreased 1% year-over-year, primarily due to declines in Baidu's online marketing revenue, which could negatively impact future revenue streams and profit margins.
  
• The operating income in the fourth quarter decreased, reflecting pressures on Baidu’s profit margins due to onetime losses, potentially affecting earnings.
  
• Baidu's AI Cloud business, though showing robust growth, could face challenges if demand fluctuates or margins tighten, impacting overall profitability.
  
• While expecting improvements, Baidu's advertising business is sensitive to macroeconomic conditions, which might pose risks to revenue recovery.
  
• The competitive landscape in AI and autonomous driving, particularly from companies with ecosystem strategies, could impact Baidu's market share, potentially affecting earnings and business growth.

Valuation

• The assumed bullish price target for Baidu is $129.96, which represents one standard deviation above the consensus price target of $110.52. This valuation is based on what can be assumed as the expectations of Baidu's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $156.28, and the most bearish reporting a price target of just $75.63.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CN¥162.4 billion, earnings will come to CN¥33.4 billion, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 9.5%.
• Given the current share price of $84.55, the bullish analyst price target of $129.96 is 34.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.