Baidu shares have been on an upward trend in the runup to its second-quarter earnings announcement on 30 August. Analysts have an optimistic outlook on the stock after the tech company reported positive growth in its cloud and autonomous driving businesses in the first quarter.
The Baidu [BIDU] share price notched a five-day winning streak in the week before its Q2 earnings release on 30 August. While the tech stock is only up 1.5% year-to-date, a recent Chinese stimulus package boosted its shares 17.7% in the last five days to close at $151.02 on 25 August.
Baidu’s US-listed shares have outperformed the Nasdaq Composite’s 19.2% decline so far in 2022. The tech-heavy index has struggled amid the market’s broad rotation from growth to value. Baidu’s Hong Kong-listed [9888.HK] shares, which are up 0.3% in the year-to-date, have also outperformed the KraneShares SSE STAR Market 50 Index ETF’s [KSTR], which tracks the performance of the Shanghai Stock Exchange’s STAR 50 index, 29.6% fall over the same period.
China has seen a resurgence in Covid-19 cases in the last few months and narrowly avoided economic contraction in the second quarter, with the economy only expanding 0.4% year on year. There are concerns that this economic slowdown will cut advertising spending on Baidu’s search engines and could harm long-term future revenue.
Q1 earnings strong despite Chinese economy cool down
Despite the challenges facing Baidu’s domestic market, it was still able to produce a strong set of results for the first quarter of the year. The company reported revenue of $4.48bn for the quarter, which comfortably beat estimates of $4.16bn.
The strong revenue was the result of solid performance from its core business. In particular, the company’s non-advertising revenue increased by 35% year-on-year and was driven by growth from its Baidu AI Cloud, which grew by 45%.
The company did see a small 4% decline in its online marketing revenue, which represented a cool-off in advertising expenditure from Chinese companies. Alongside this, Baidu reported $466m in losses, which was the result of a decrease in value from its long-term investments in private and public companies.
The group saw the first signs of inflation eating away at margins for the quarter. Cost of revenues increased 4% to $2.45bn as core costs such as bandwidth and traffic acquisition rose. Research and development expenses also increased 10% due to high personnel expenses.
Analysts optimistic as Baidu launches driverless taxis
In the company’s Q1 earnings, Robin Li, co-founder and CEO of Baidu, highlighted to shareholders that its Apollo Go service secured a permit to operate China’s first-ever driverless taxis. It will be able to operate its Apollo Go cars in central Wuhan between 9am to 5pm and in the Chongqing municipality between 9:30am to 4:30pm without the need for a safety supervisor on board. This has given the company a strong edge in the race to develop fully autonomous driving vehicles in the country.
However, there are some concerns amongst shareholders regarding the long timeframe for the commercialisation of driverless vehicles. It is likely to take several years for the venture to be profitable.
While the company has an estimated 70% market share of the Chinese internet search industry, investors will be concerned that its largest source of revenue, advertising, declined in the last quarter. That is why developing new revenue streams in the driverless vehicles sector and strengthening existing divisions such as its AI Cloud business is vital if the company wants to continue to grow.
Despite several challenges facing the company, analysts have optimism in Baidu shares. Out of 41 analysts polled by the Financial Times, 12 gave the shares a ‘buy’ rating, 21 believed the shares would ‘outperform’, six rated them ‘hold’, one ‘underperform’ and the remaining one ‘sell’. Of 39 of these analysts offering 12-month price targets, the median target was $200, which represents an upside of 32.4% from 25 August close.