Is Baidu's share price a better bet than Alibaba?

Baidu's [BIDU] share price is effectively flat on the year. Having seen advertising revenues shredded thanks to the coronavirus, China's biggest search engine is lagging behind its tech rivals. Alibaba's [BABA] share price, for example, has soared 35.6% so far this year, while Tencent's [0700] is up 40.95%.

While some investors may have missed out on backing Alibaba and Tencent when they were more affordable, Baidu's share price could represent an opportunity. After all, data suggests the Chinese economy is already rebounding following the pandemic.

If this recovery leads to more advertising revenue as companies once again increase marketing budgets, Baidu's share price could be about to surge.

Why should investors care about Baidu's share price?

China's economy is recovering post-lockdown

As a search engine, Baidu makes its money from advertising spend. This took a hit in the first half of the year as the coronavirus saw companies cut advertising budgets to stay afloat. In the second quarter, online marketing revenue came in at $2.5bn, an 8% decrease from the same quarter last year.

Overall, revenue in the second quarter was $3.69bn, a 1% drop from last year. In the third quarter, Baidu expects revenue to be between $3.7bn and $4.1bn, representing a 6% decrease to 2% increase year-on-year.

While this makes for gloomy reading, China's economic recovery is gaining pace. PMI for services grew to 55.2 from 54.2 in July, according to the National Bureau of Statistics. This is the biggest gain in 2 years and leaves countries like the US in the dust.

Longer-term, The International Monetary Fund predicts growth for China will be 1.2% in 2020, and above 5% a year between 2021 and 2025. If China's economy does see this level of recovery, Baidu's share price could be a Buy right now.

Growth outside of advertising revenue

Analysts often cite the diverse nature of Alibaba's business as a reason to invest but Baidu isn’t a one-trick pony either. In the second quarter, the Baidu App hit 204 million daily users, a 16 million increase year-on-year. Baidu also increased its AI presence with its autonomous driving Apollo programme. Baidu expanded operations of its Robotaxis in Beijing, Changsha and Cangzhou. It also completed its 145,000 square foot Apollo Park facility in Beijing.

"With COVID-19 becoming more manageable in China, Baidu's business is steadily rebounding. We are pleased that in-app revenue grew in the second quarter, despite a challenging macro environment, further validating our strategy to make Baidu App a super app through AI-powered building blocks and marketing cloud platform," said Robin Li, Co-founder and CEO of Baidu.

Video streaming platform iQIYI, which Baidu has a majority stake in, saw a 19% increase in membership in Q2, although the service is still loss-making. It's also facing an investigation from US regulators, which has weighed on Baidu's share price and iQIYI’s.

“With COVID-19 becoming more manageable in China, Baidu's business is steadily rebounding. We are pleased that in-app revenue grew in the second quarter, despite a challenging macro environment, further validating our strategy to make Baidu App a super app through AI-powered building blocks and marketing cloud platform” - Robin Li, Co-founder and CEO of Baidu

Ray Dalio increases Baidu holding by 251.53%

Ray Dalio, the investing supremo behind the world's biggest hedge fund Bridgewater Associates, is a vocal advocate for the Chinese economy. Three of Bridgewater's top five buys in the last quarter relate to China, according to the hedge fund's latest 13F.

That filing also showed that Bridgewater had increased its ownership in Baidu by 251.53%, up 84,629 shares to a total of 333,373 shares in the company. For Dalio, backing China now is like backing Britain during the industrial revolution. If that’s true, then companies at the forefront of China’s tech economy, like Baidu, could see long-term gains in their share price. 

So, is Baidu’s share price a bargain?

As China rebounds, Baidu's share price could catch up with peers like Alibaba. It could also be better value than its tech counterparts. Baidu carries a price to earnings multiple of 9.88X, well below Tencent's 50.07X and Alibaba's 81.18X.

Baidu’s share price carries an average analyst target of $145.71 on Yahoo Finance, which would see a 14.8% upside on the current share price if hit (as of 1 September’s close). Of the 33 analysts tracking the stock, 8 rate it a Strong Buy and 11 a Buy, which shows a degree of confidence in Baidu's share price. However, hitting targets will depend upon the pace of China's recovery and how successfully Baidu diversifies its revenue streams.