AI Transformation And ERNIE Expansion Will Boost Future User Engagement

Key Takeaways

• AI-driven transformation and ERNIE expansion could boost revenue and user engagement through enhanced product offerings and enterprise adoption.
  
• Autonomous driving and cloud growth strategies indicate potential long-term revenue increases and market position strengthening.
  
• Baidu faces growth challenges with flat revenues, declining ad revenue, rising costs, and long-term focus on AI, amidst economic uncertainty impacting ad spending.

Catalysts

Provides online marketing and cloud services through an internet platform in the People’s Republic of China.

• Baidu's AI-driven transformation, particularly with ERNIE 4.0 Turbo, aims to enhance product offerings and user experiences, likely boosting user engagement and revenue from personalized content generation.
  
• The expansion of ERNIE agents across various industries and their increasing adoption by enterprises could lead to new revenue streams and improved net margins through enhanced marketing and customer engagement solutions.
  
• Baidu AI Cloud's continued double-digit growth and its strategy of focusing on high-growth areas, such as Gen AI, suggest potential long-term revenue increases and strengthened market position within China's AI cloud industry.
  
• Baidu's focus on autonomous driving technology, including expansion plans for the Apollo Go robotaxi service and asset-light operation strategies, could eventually lead to significant revenue contributions and profitable growth.
  
• Planned share repurchases and a strong capital allocation strategy signal potential for increased shareholder value and earnings per share growth.

Baidu Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Baidu's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.3% today to 16.5% in 3 years time.
• Analysts expect earnings to reach CN¥25.6 billion (and earnings per share of CN¥79.6) by about December 2027, up from CN¥20.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CN¥20.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 1.8x on those 2027 earnings, down from 11.3x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 25.4x.
• Analysts expect the number of shares outstanding to decline by 2.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.71%, as per the Simply Wall St company report.

Baidu Future Earnings Per Share Growth

Risks

• Baidu's Core total revenue was roughly flat year-over-year, indicating current growth challenges, which may impact future revenue growth potential.
  
• Online marketing revenue declined by 4% year-over-year due to macroeconomic conditions, suggesting potential ongoing pressures on Baidu's ability to generate ad revenue.
  
• Cost of revenue increased due to higher traffic acquisition costs and AI Cloud expenses, which could pressure net margins if revenue does not grow accordingly.
  
• Baidu's plans for AI-driven search transformation prioritize long-term value over short-term gains, possibly affecting earnings in the near term as new monetization strategies develop.
  
• Uncertainty in ad spending sentiment and macroeconomic conditions could constrain ad revenue growth and impact earnings if economic recovery remains slow.

Valuation

• The analysts have a consensus price target of CN¥111.04 for Baidu based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CN¥166.48, and the most bearish reporting a price target of just CN¥75.56.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥155.5 billion, earnings will come to CN¥25.6 billion, and it would be trading on a PE ratio of 1.8x, assuming you use a discount rate of 8.7%.
• Given the current share price of CN¥90.18, the analyst's price target of CN¥111.04 is 18.8% 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.