Baidu Inc: 3 Reasons to Be Bullish on BIDU Stock

BIDU StockMore Upside for BIDU Stock?

Baidu Inc (ADR) (NASDAQ: BIDU) experienced a rough ride this year based on its stock performance. The leading Chinese-language Internet search provider was hit by negative reports, which resulted in the decline of BIDU stock by more than eight percent year-to-date.

In February, Canadian security experts revealed security issues with the Baidu browser. They reported that thousands of apps using a Baidu code collected and transmitted users’ personal data without encryption or with encryption that can be decrypted easily. (Source: “Baidu’s and Don’ts: Privacy and Security Issues in Baidu Browser,” Citizen Lab, February 23, 2016.)

In May, Baidu disclosed that Chinese regulators investigated its business practices and compliance with regulation following reports that a Chinese college student died of cancer after a failed experimental immunotherapy treatment received at a hospital, which appeared on top of the company’s search results. Chinese regulators ordered Baidu to modify its practices related to its online marketing services and auction-based paid search and to establish and improve its user protection mechanisms. (Source, “Baidu Takes Immediate Measures to Improve Online Marketing Services and Enhance User Experience,” Baidu Inc, May 10, 2016.)

BIDU Stock Poised for Double-Digit Gains?

These problems struck BIDU stock hard, which made investors wonder if investing in Baidu is still safe and rewarding. The answer is likely yes, because the company survived these challenges, which Baidu CEO Robin Li described as just “short-term hiccups.”

Baidu’s second-quarter financial results remained strong, despite the impact of new regulations and stricter standards imposed by the Chinese government regarding Internet advertising, particularly to the healthcare sector.

The Chinese-language Internet search provider reported total revenue of $2.75 billion for the second quarter, an increase of 10.2% in the same period last year. Its adjusted earnings were $1.22 per American Depositary Shares (ADS). (Source: “Baidu Announces Second Quarter 2016 Results,” Baidu Inc, July 28, 2016.)

Wall Street analysts expected Baidu to report total revenue and earnings of around $2.55 billion and $1.05 per ADS, respectively.

According to Baidu Inc, its online marketing revenue climbed 4.4% to $2.55 billion. It had 594,000 active online marketing customers by the end of the quarter. Its revenue per online marketing customer was around $4,273, an increase of 3.6% from the year-ago quarter.

Baidu’s mobile search monthly active users (MAUs) increased 6% to 667 million, and mobile map MAUs rose 13% to 343 million. Its gross merchandise value for transaction services went up by 166% to $2.7 billion.

The company has a strong balance sheet, with total cash of $11.42 billion and total debt of $5.89 billion during its most recent quarter. Based on those figures, it can pay its debt easily or reduce it significantly at any time. Additionally, Baidu can use its substantial cash to invest in opportunities that could drive growth and profitability.

Baidu is Well Positioned to Achieve Long-term Growth with AI

Over the past few years, Baidu has been investing in artificial intelligence (AI), which is expected to transform the technology industry. In fact, in June last year, Baidu’s AI supercomputer called “Minwa” beat Alphabet Inc’s (NASDAQ: GOOG) supercomputer in image recognition.

Minwa set a new record after training a neural network for image recognition software involving 1.5 million labeled images in 1,000 different categories. The Baidu supercomputer’s top five guesses for a particular image was wrong only 4.58% of the time, compared to 4.82% for Google, which was recorded in March last year. (Source: “Baidu’s Artificial-Intelligence Supercomputer Beats Google at Image Recognition,” MIT Technology Review, May 13, 2015.)

Baidu is already benefiting from its AI infrastructure, which helps improve its search modernization and the accuracy of voice and image recognition. The AI infrastructure also allows the automatic drafting of ad titles based on user profiling and user queries. Additionally, it filters out low-quality results and predicts click-through rates for sponsored links, according to CEO Robin Li during the company’s earnings call with investors last month.

Furthermore, Baidu’s AI infrastructure opens opportunities in financial services, particularly in education loans, online banking, and online insurance. The company has already established a leading position in providing loans in the education sector, in just six months, due to its strong AI capability.

The Chinese-language Internet service provider is currently offering online and mobile payment services through “Baidu Wallet,” which had 80 million activated accounts (up 131%) by the end of the second quarter.

Baidu Inc recently launched three new platforms—smart big data, smart multimedia, and smart Internet of Things (IoT)—for business customers that are using its cloud service in China. The company is confident that its cloud business will be successful, given the fact that it has already signed up a number of very large and established customers.

According to Li, “Baidu’s value proposition remains robust.” He also expressed commitment and enthusiasm regarding the company’s ambition for its future.

The Bottom Line for BIDU Stock

The challenges confronting Baidu are just short-term. The company has a lot of growth drivers in its chest; AI is just one of them. The company is also heavily investing in autonomous cars, and it is also exploring opportunities in the virtual reality (VR) market through its subsidiary iQiyi. (Source: “Baidu subsidiary iQiyi unveils ambitious virtual reality plan,” South China Morning Post, May 5, 2016)

You should also remember that Baidu dominates Internet searching in China; it has a steady revenue stream from keyword-search advertising, and a strong balance sheet. In other words, Baidu is a great company and investors could generate substantial returns from BIDU stock over the long term.