Baidu Inc (ADR) (NYSE:BIDU) stock joined the Chinese internet stock party after reporting blowout second quarter numbers in July. BIDU stock rallied 30% from that earnings report into the company’s next earnings report. But the rally was short-circuited by mixed third-quarter-earnings. Since then, BIDU stock is down more than 10%.
The decline in BIDU stock brings its year-to-date gains to 42%. While that is still a very good mark, it doesn’t compare favorably to other Chinese internet stocks. JD.Com Inc(ADR) (NASDAQ:JD) is up 50% year-to-date. Alibaba Group Holding Ltd (NYSE:BABA) is up 100% year-to-date, while Weibo Corp (ADR) (NASDAQ:WB) is up more than 150% year-to-date.
In other words, BIDU stock is winning this year, but not as much as it could be given how its peers have performed. Does that mean buy BIDU stock? I think so. The China internet growth narrative appears to still be in its early innings with multiple years of growth ahead.
Consequently, I think now is a good time to start accumulating the “under-performing” China internet names. BIDU stock is the first one on my list. Here’s why.
China Internet Usage Boom Is a Major Tailwind for Baidu
The China internet growth narrative is very strong. China’s middle-class is starting to urbanize at an unprecedented rate. This is big news because China has so many people. China’s working population numbers 770 million, more than 5 times as big as America’s working population.
Therefore, as these 770 million Chinese consumers start to adopt the consumer behavior of America’s 140 million consumers, growth will be huge and far-reaching. Of course, everyone thinks of Alibaba and JD.Com as big winners here. The more people urbanize, the more people will shop.
But Baidu is actually one of the biggest winners here. The more people urbanize, the more people use the internet. Just look at data from Singles’ Day. Singles’ Day is China’s Black Friday and Cyber Monday, but much larger. It is the biggest e-commerce day in the world.
This is supposed to a big day for Alibaba and JD.Com. But this year, it was also a big day for BIDU, who reported that advertising revenue surged 120% higher on Singles’ Day. That is a big number, especially considering BIDU’s revenue growth is trending around 20-30%.
This 4 to 6 times supercharged revenue growth on Singles’ Day underscores the thesis that the China internet growth narrative is only strengthening. And that BIDU, like BABA, will be a big winner as this growth story continues to pick up momentum.
Smart Home, Ride Sharing, and AI Tailwinds Are Coming Soon
But BIDU is much more than just China’s digital search engine. Taking a page out of the Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL) playbook, BIDU is jumping into the smart home market by launching its own voice assistant products.
Considering that China usually lags America in terms of tech adoption trends and that smart home products have been hugely popular in the United States, smart home tech adoption in China will be a big growth story to follow over the next several years.
BIDU is particularly leveraged to deliver a market-leading product in this space. The search giant is the leading Chinese tech company in AI. BIDU can integrate this market-leading AI research with robust digital search data to deliver a very smart voice assistant.
But voice assistants and other smart home products are just one part of Baidu’s AI growth narrative. Just look at what big tech companies in the US are doing with AI. We are talking autonomous driving, machine learning, data centers, so on and so forth.
The one thing BIDU seems intent on diving into is autonomous driving. Not only has BIDU been experimenting with autonomous vehicles in Beijing (the first time driver-less cars have hit public roads in China), but BIDU also recently invested in a Chinese ride-booking company.
Clearly, BIDU has intentions of powering a driver-less ride-sharing service, much like what Google is doing with Waymo.
Bottom Line on BIDU Stock
Over the next several years, the Chinese technology landscape will start to look more and more like the American technology landscape. BIDU is at the heart of this massive transformation, implying multiple growth tailwinds for the next several years.
Consequently, the recent weakness in BIDU stock is a buying opportunity. Upside potential is huge, while downside risk is limited due to an already constrained valuation (27x this year’s earnings for 18% projected growth is about as good of a valuation-to-growth profile you will find in hyper-growth tech).
Big reward, small risk is the exact type of set-up I like to see in the stock market.
As of this writing, Luke Lango was long BIDU, BABA, JD, WB, and GOOG.
