With Chinese internet search engine owner Baidu (NASDAQ:BIDU) looking poised to make a great deal of money from autonomous vehicles and its shares trading at a relatively low valuation, now is a very good time for long-term investors to buy BIDU stock.
Moreover, I think there’s a very good chance that the company’s old search engine business and its new auto business may very well form an extremely powerful virtuous cycle that will ultimately propel BIDU stock higher.
A Big Splash in Autos
The large Chinese automaker Geely, which owns the well-known and well-regarded European automaker, Volvo, is partnering with Baidu to develop “connected, autonomous electric vehicles,” CarandDriver reported in January.
Baidu and Geely intend to form a new firm that will develop and market the autonomous vehicles (AVs). Importantly, Baidu’s autonomous vehicle unit, Apollo, is already testing robotaxis in the Chinese city of Cangzhou, and last month, it obtained permission to begin charging passengers for using 35 of its autonomous vehicles (AVs) there. The 35 AVs will have “safety drivers” behind the wheels in case they are needed.
But, proving wrong those who say there will be no fully truly autonomous vehicles for many years, Apollo has been permitted to test another ten of its AVs in the city without any drivers behind the wheel.
The search engine operator is only the second company to test paid commercial robotaxis in China. Given Baidu’s lead over most of its competitors in AVs and the tremendous profits that AVs will generate, as well as the benefits that Baidu will receive from its partnership with Geely, I expect AVs to greatly lift Baidu’s bottom line within two or three years.
Further, on Mar. 29, research firm Loop Capital raised its rating on BIDU stock to “buy” from “hold,” citing the strength of the company’s AV business. The firm believes that Baidu is “leading the pace of AV commercialization in China by a wide margin across many metrics.” Loop increased its price target on the shares to $290 from $210.
A Potential Virtuous Cycle
Baidu is likely to use a portion of the profits and the personal data it will receive through its AV business to improve its search engine. Those innovations, in turn, will entice many more consumers to utilize its search engine more often, enabling it to gain market share against its competitors. (Unlike Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), Baidu is not totally dominant in the search engine market of its home country, as it has a 78% share of the market).
Baidu will then be able to advertise its AVs on its search engine, starting the process all over again.
The Chinese Economy Is Strongly Rebounding
There are multiple signs that China’s economy is in the midst of a strong recovery. Its exports jumped 30.6% year-over-year in March. while its imports soared 38.1% YOY last month. It’s true that the increases were impacted by the fact that the nation was greatly affected by the novel-coronavirus pandemic in March 2020.
Still, in the wake of the data, Nie Wen, a Hwabao Trust economist said, “Strong foreign demand is likely to be sustained throughout the second quarter as the global economy further recovers,” according to Reuters.
Moreover, also in March, China’s “official purchasing managers’ index” increased “to 51.9 from 50.6 in February,” Bloomberg reported. And its non-manufacturing index increased “to 56.3, the highest since November” 2020, the news service added. Loop Capital also expects Baidu to be boosted by the economy’s rebound.
Valuation and the Bottom Line on BIDU Stock
Baidu’s shares have tumbled 20% in the last month. The pullback appears to have been largely caused by a huge amount of stock selling by Archegos Capital. I agree with Citi’s belief that the subsequent retreat of Baidu and other large Chinese equities was not at all linked to fundamentals.
Given Baidu’s strengths and the fact that its trailing price-earnings ratio is now just 21, I recommend that longer-term investors buy BIDU stock.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.