Baidu Inc (ADR) (NASDAQ:BIDU), the Chinese search engine seeking to become an artificial intelligence powerhouse, reports earnings after the U.S. market closes on Thursday, April 27. And BIDU stock holders are expecting big things.
The official analyst estimate on earnings is 86 cents per share, on revenue of $2.32 billion. That would represent 10% top-line growth over a year ago, but only a little more than half the earnings. But there is a “whisper number,” one analysts are telling their top clients, of 97 cents, which is much higher. Baidu itself said last month to expect revenue of about $2.4 billion.
Anticipating good news, investors have bid up BIDU stock in the company by 8% over the last month. It opened for trade April 25 at about $180 per share and immediately gapped higher, to $183.50.
The phrase “irrational exuberance” comes to mind, because officially there are more Baidu analysts with a “hold” rating on the stock than a “buy” rating.
Baidu: The Exuberance
Going into earnings, Baidu is making a lot of news that supports a higher price for the stock. What was once a search engine is in the process of becoming a media-automotive-AI powerhouse.
For instance. Netflix Inc. (NASDAQ:NFLX) says it will get into the Chinese market through a deal with Baidu’s iQiyi service. That should grow Baidu revenues sharply.
Baidu is using an open source approach to improve its self-driving car technology so China can compete against Tesla Inc (NASDAQ:TSLA), Alphabet Inc (NASDAQ:GOOGL) and other U.S. companies that are still holding their technology as proprietary. That is good news for everyone; I like open-source approaches.
Baidu has bought xPerception, a U.S. company focused on artificial intelligence, which helps make up for the fact that its chief scientist, Stanford professor Andrew Ng, recently left the company.
Baidu is, like rival Alibaba Group Holding Ltd (NYSE:BABA), expanding its cloud with help from Nvidia Corporation (NASDAQ:NVDA), whose graphics chips turn out to be key to making AI work on a massive scale. The company’s work on AI has helped it achieve its present valuation, and the NVIDIA deal indicates it is prepared to deliver on the promise.
Baidu has also sold its mobile gaming business in January — a move that gives it cash it can invest in its AI efforts.
Baidu: The Reality
All these smart moves do little to change the company’s numbers in the near-term.
This could be like Amazon three years ago, when it was trading under $300 per share, but only if Baidu delivers. The difference is that bears were stalking Amazon then. They are not being heard about BIDU stock now.
The smart moves also don’t change the reality of an overheated Chinese market, with private debt piling up quickly, and a $10 trillion national debt equivalent to U.S. levels many analysts find worrisome.
Baidu itself does not have a debt problem, with only one-quarter of its assets subject to debt, but that is because the company’s market cap of $64 billion is so huge, representing almost seven times its annual revenue. This is for a company which had less revenue in the December quarter than it did a year earlier.
What to Do With BIDU Stock?
Our Nicholas Chahine believes Baidu stock is breaking out to the long side and believes that an options strategy can help smart investors capture the gains. A strategy he described just last Friday is already in the money.
In a frothy market, options are a good bet for profit. They are especially powerful when momentum is strong and fundamentals are weak.
That is the case with Baidu. That is the way to play.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long AMZN, BABA and GOOGL.
