Seasonal strength should give Baidu, Inc. (NASDAQ:BIDU) a lift in revenue this quarter, that is on top of the 120% growth in sales last month after Singles’ Day. But even with that impressive number, the stock drifted lower. Despite having trouble resuming its strong rally, demand in its advertising business is getting better. BIDU stock is due for another bump.
Growth from Singles’ Day
On Nov. 15, Baidu said that advertising revenue grew 120% from last year on Singles’ Day. The company benefited from a variety of industries embracing the event, from beauty products to education industries to housekeeping services. Baidu cannot credit the wider addressable market alone for the growth, though.
The search engine giant re-tooled its algorithm to better match user needs to advertisements. By matching its own customer database with user needs, advertising effectiveness improved.
Though Christmas and Boxing Day are not big holiday events in China, the region should still benefit from companies spending more on advertising in that time. With the way the stock is trading, Baidu investors are discounting any above-average revenue growth this quarter.
BIDU stock topped ~$275 in October before settling recently at around $237.
New Market for BIDU stock
Just as Amazon.com, Inc. (NASDAQ:AMZN) extended search capabilities of its online store to, Alexa, Baidu introduced Raven H this month. But the company has plenty of competition. Alphabet Inc (NASDAQ:GOOG) already has Google Home. JD.Com Inc (NASDAQ:JD) already has a smart speaker on the market that costs less.
So does Alibaba Group Holding Ltd (NYSE:BABA). But Baidu’s release of a smart speaker is required to keep the company relevant. By getting its AI technology out, the company may showcase its platform while exploring new and exciting possibilities.
If it ends up that Baidu is just another company copying Amazon, then Raven H could end up becoming a dud on the market. Conversely, Wal-Mart Stores Inc (NYSE:WMT) is not building smart speakers but is instead competing directly with Amazon.com on price. The smart speaker market is becoming rapidly crowded.
Having Amazon.com and Baidu dominating the space would hurt Baidu’s prospects, but that is okay. The company is not spending much on this initiative. Instead, it is setting up uses-cases for the AI technology powering Raven H. That information will give Baidu the data it needs to develop its back-end solution.
Valuation
BIDU stock trades at a 35 times P/E multiple, so it is hardly cheap. Sales will grow by over 30 percent in the next five years while EPS growth will end up in the single digits. With very little debt and heavy but strategic investments in AI, investors may accept the slow near-term growth for now.
Wall Street analysts have the BIDU stock average price target of $267 a share. Of the eight models combined, the average price target is $257, implying an upside of 8%. Value investors should use the 5Y DCF Growth Exit model to estimate Baidu’s fair value. Assuming a steep discount rate of between 12 – 13 percent, BIDU stock has upside as high as 9%. Here is a link to the model.
Takeaway
Baidu had a good run throughout 2017 before pulling back in October. The markets are hesitant in bidding the stock higher since strong revenue growth from Singles’ Day is priced in the stock already. Until the company reports, at the end of January, strong sales continuing throughout the rest of the quarter, the stock could stay range-bound.
After giving its investors a 45 percent return in 2017, the pause in the share price may end soon.
Disclosure: Author does not own shares in any of the companies mentioned.
