Why Baidu Inc Is More Than Just an Average Mobile Search Company

BIDU - Why Baidu Inc Is More Than Just an Average Mobile Search Company

Baidu Inc (NASDAQ:BIDU) delivered strong performance for its mobile search and feed in the third quarter. Yet, while the business grew from last year, the company is making it clear to its investors that Mobile Baidu is not the only business that it is in. The company is getting into AI and autonomous driving as well.

Mobile Baidu

Baidu’s core business did well in the third quarter, thanks to the company building the business foundation on two functions: mobile search and feed. User activity grew 2% from last year due to the growth in rich content, which includes video and content within top mobile apps.

BIDU developed an algorithm that recommends content in its feeds that best fit the user. As a result, users spent 15% more time on Mobile Baidu as compared to the previous quarter. After just one year, Feed accounted for $1 billion in revenue annualized.

Click-through rates and user satisfaction improved with Baidu’s know-how in applying AI algorithms to its feed. Users get personalized information presented to them. As a result, users consume more video and short videos. BIDU uses artificial intelligence and big data to power dynamic ads targeting individual consumers in its feed, which has proven to be very effective. For example, the ROI for JD.com (NASDAQ:JD) more than doubled since it started using dynamic ads in July 2017.

Baidu’s Search delivered an operating margin of around 50%. The company then invested around 30% of its revenue back into the mobile business and AI developments.

AI Developments

Baidu recently launched an open source ADAS platform called Apollo 1.5. To accelerate its adoption, the company created a multi-billion dollar fund to support the ecosystem and added key features to the platform, including an HD map, map engine perception, planning and control and LIDAR reference implementation. BIDU now has 74 OEM ecosystem partners.

DuerOS is a conversational voice and natural language interface on the AI platform. Most importantly, Baidu is working with third-party device makers like TCL, Lenovo, Vivo, and Xiaomi to develop products on the platform.

Entertainment

To avoid missing out on growing demand for video and entertainment, Baidu’s iQiyi streamed China’s first rap reality show called The Rap of China. In its first season, the show attracted 2.7 billion views. In August, users spent around 30% more time (461 billion minutes) on the mobile iQiyi app compared to last year. Investors should not expect any less from iQiyi in the future. So far, it has grown at a 50% year-over-year rate every quarter. Although growth will slow to the 40% range in the fourth quarter, Baidu’s overall revenue will grow between 25% and 34% from last year.

Headwinds

Baidu’s TAC (traffic acquisition costs) fell in the third quarter. Its SG&A costs rose in the quarter due to a debt allowance for Baidu Deliveries. Mobile Baidu is growing nicely, but it also weighs on TAC.

Historically strong growth for Baidu’s core businesses does not guarantee that momentum will continue. To offset the potential slowdown in traditional search, management is adding video content, just as Twitter, Inc. (NASDAQ:TWTR) did. It is integrating content on its Mobile Baidu platform. Tieba, Zhidao, and Baike all supply content on Baidu’s feed product. With the content push, BIDU ultimately ends up having a stronger ecosystem.

Bottom Line on BIDU Stock

Investors looking for exposure to the Chinese market should consider Baidu. Of the 9 models built on finbox.io, the average fair value implies BIDU stock has at least 7% upside.

Conversely, simplywall.St believes the stock is overvalued based on its future cash flow and price relative to the stock market.

BIDU’s strong return on equity of over 20% in the next three years and management’s clear growth plan should favor long-term shareholders.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/baidu-bidu-mobile-search/.

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