Along with various other large Chinese tech companies, Baidu (NASDAQ:BIDU) stock started an impressive rally in November. The shares would go from $136 to $354 in mid-March.
But since then, things have not gone so well. Note that BIDU stock is now fetching $216 and the market capitalization is $73 billion.
Of course, Wall Street has been rotating away from growth stocks to cyclicals and travel companies, as the novel corona virus has begun to fade away. It is far from clear how long this move will last.
However, as for Baidu, the fundamentals have certainly been improving. There has also been encouraging traction with its efforts with cloud computing and AI (Artificial Intelligence) and ML (Machine Learning). In the meantime, the company has looked for ways to enhance the stock price, such as with an increase in the buyback program.
But despite all this, I actually think investors should be wary on BIDU stock. Why so? Well, here are some risk factors that can mean further selling:
The traditional key-word search business has remained quite robust over the past two decades. But the market is starting to change. There has been the emergence of video content, which has become a form of search. Oh, and even audio is becoming a factor. This has been the case with the huge success of Clubhouse as well as with AI assistants, like Apple’s (NASDAQ:AAPL) Siri and Amazon’s (NASDAQ:AMZN) Alexa.
In such an environment, it can be tough for a legacy company like Baidu to remain competitive and relevant. Now it has been investing in building video platforms like IQIYI (NASDAQ:IQ). Yet this business has been under pressure. In the latest quarter, the revenues dropped by 1% to $1.1 billion and there was a net loss of $237.2 million.
Another issue for BIDU stock is Tencent Holdings’ (OTCMKTS:TCEHY) WeChat. This platform – which has over 1.1 billion users – has become a core way for people to engage in a myriad of activities like e-commerce, ride hailing, video calling and so on.
The AI Play
It’s true that Baidu has built an impressive set of AI technologies. This has been a part of significant investment in R&D.
For example, the company’s DuerOS smart assistant logged 6.2 billion MAU (Monthly Active User) queries, up 66% on a year-over-year basis. The system provides more than 4,400 skills and has a developer community of about 47,000.
As for the autonomous technology, Baidu has certainly made progress. The Apollo Self Driving (ASD) system was able to snag partnerships with ten local and multinational automakers. The applications are for areas like automated parking, and high-definition maps.
However, investors should temper their expectations. The reality is that self-driving technology has proven extremely complicated and the adoption has been slow. In other words, monetization will likely take time to hit critical mass.
Regulatory Issues for BIDU Stock
In the waning days of the Trump Administration, there were rules adopted to delist Chinese stocks if certain audit standards were not maintained. And yes, there are signs that the SEC (Securities and Exchange Commission) may carry this out. For the most part, the Biden Administration is no fan of China either.
So if there is a delisting of BIDU stock, this would mean much less liquidity and transparency. These are certainly major risk factors.
But there is something else investors need to be concerned about: China’s own regulatory moves. It appears that President Xi is getting more intrusive with big tech, as seen with the moves against Alibaba (NYSE:BABA). All in all, this may ultimately result in new restrictions on Chinese companies that could hamper growth and profitability.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.