Open Sourcing ERNIE 45 And Apollo Go Expansion Will Drive Future Engagement

Key Takeaways

• Strong AI Cloud growth and ERNIE adoption boost future revenue and margins, enhancing API use and enterprise engagement.
  
• AI integration in search, ride-hailing, and consumer products drives user engagement and ad monetization, supporting revenue growth and margin improvement.
  
• Baidu faces revenue challenges in core marketing and overall streams, with high costs in AI affecting margins, amid competitive and regulatory pressures in Chinese AI/auto sectors.

Catalysts

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

• Baidu's AI Cloud business is demonstrating strong momentum with a 26% year-over-year revenue growth, driven by market recognition of its AI capabilities and partnerships with leading enterprises. This growth is expected to positively impact Baidu's future revenue and margins.
  
• The adoption of Baidu’s foundation model ERNIE is expanding, with the company planning to open source ERNIE 4.5 and make ERNIE bot free. This is likely to drive broader adoption and integration of AI, which can enhance revenue through increased API usage and enterprise client engagement.
  
• Baidu is transforming its search engine with AI, with 22% of search results now containing AI-generated content. The continued deep integration of AI is expected to enhance user engagement and retention, which can improve ad monetization and revenue growth in the future.
  
• Baidu's autonomous ride-hailing service, Apollo Go, is expanding operations and business model validation, setting the stage for accelerated growth and potential profitability. This can contribute to revenue growth and improved net margins as the business scales up.
  
• The strong revenue growth in Baidu Wenku and the integration of AI capabilities into its consumer-facing products suggest potential for increased subscription revenue and user engagement, which will positively affect earnings and revenue diversification.

Baidu Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Baidu's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.8% today to 16.7% in 3 years time.
• Analysts expect earnings to reach CN¥25.7 billion (and earnings per share of CN¥76.8) by about March 2028, up from CN¥23.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥33.4 billion in earnings, and the most bearish expecting CN¥19.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.8x on those 2028 earnings, up from 10.1x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 17.9x.
• Analysts expect the number of shares outstanding to decline by 1.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.26%, as per the Simply Wall St company report.

Baidu Future Earnings Per Share Growth

Risks

• Baidu's core online marketing revenue, a significant portion of their total revenue, decreased by 7% year-over-year in the fourth quarter, suggesting challenges in their main business segment. This decline in revenue is a concern for future earnings.
  
• The continued reduction in Baidu's fiscal year revenues, which decreased by 1% year-over-year in 2024, indicates potential difficulties in maintaining or growing overall revenue streams, impacting earnings.
  
• Operating income decreased due to one-time losses, including write-downs of inventories, which could signal inefficiencies or challenges in inventory management and lead to reduced net margins.
  
• Although AI Cloud shows strong growth, the high costs associated with building and maintaining AI infrastructure might offset potential revenue gains, adversely affecting net margins or earnings.
  
• External market and regulatory challenges, as well as competitive pressures in China's burgeoning AI and autonomous driving sectors, pose risks to Baidu’s ability to sustain and expand its market share, potentially affecting future revenue and profit forecasts.

Valuation

• The analysts have a consensus price target of $110.407 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 $157.97, and the most bearish reporting a price target of just $76.48.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥153.8 billion, earnings will come to CN¥25.7 billion, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of $94.8, the analyst price target of $110.41 is 14.1% 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.