Can Chinese technology giant Baidu (NASDAQ:BIDU) recover from the drubbing that Bidu stock has taken this year?
The Beijing-based company that specializes in artificial intelligence and internet services has been beaten down heavily as Chinese authorities continue to crackdown on the country’s leading companies and as investors in the U.S. run from once promising China-based securities. In the past six months, BIDU stock has plummeted 46% to its current share price of $165.72. Since July 1 of this year, the shares have sunk nearly 10% as Chinese regulators single out one publicly traded company after another for punishment.
With the drop in Baidu’s share price continuing unabated, investors are wondering aloud when the bleeding will stop. Shareholders are hoping that BIDU stock finds a bottom as losses continue to mount.
Reversal of Fortune
Baidu and its share price got off to a promising start this year. The “Google of China,” as the company is known, was riding high after announcing plans to launch an electric vehicle venture. Investors who admired the company’s cutting edge artificial intelligence technology and popular search engine were excited about Baidu entering the electric vehicle space. BIDU stock rose 74% between January 6 and February 19, hitting an all-time high of $354.82 per share.
But then, Baidu’s fortunes turned as the Chinese government’s crackdown intensified and broadened. Foreign investors, in particular, began to sell BIDU stock, as well as shares of all Chinese companies, as regulators levied antitrust fines against Alibaba (NYSE:BABA), implemented curbs on video games made by Tencent (HKG:0700) and undermined the U.S. initial public offering (IPO) of Chinese ride hailing company Didi Global (NYSE:DIDI). Chinese stocks listed on American exchanges are down across the board, and Baidu shares got pulled down with them.
When exactly the Chinese crackdown will end, or what exactly authorities in Beijing hope to accomplish by attacking their domestic companies, is unclear. But the government actions continue.
Fundamentals Remain Strong
While Baidu itself hasn’t been singled out for punitive government actions, the damage has been done to the company’s share price. Every time the Chinese government mentions “internet monopolies,” BIDU stock dips. This is unfortunate considering how well Baidu had been performing prior to the China crackdown. As the dominant search engine, Baidu controls 80% of all internet searches conducted in the country of 1.4 billion people. Just as with Google, online advertisers pay handsomely to reach internet users throughout China via Baidu.
Also, Baidu has had great success with its cloud computing and artificial intelligence business units, with revenue in those two areas rising more than 70% in this year’s first quarter from a year earlier. Overall, the company’s revenue rose 25% to $4.38 billion in this year’s first quarter, boosted by non-advertising revenue growth of 70%. Baidu also benefited from its streaming affiliate, iQIYI, which posted a 25% increase in advertising revenue during the quarter ended March 31. Similar to Netflix, iQIYI’s streaming subscribers grew by 3.6 million to reach a total of 105.3 million.
Baidu also successfully completed a secondary share listing on the Hong Kong Stock Exchange in March of this year.
Despite Baidu getting dragged down with the rest of Chinese stocks that are listed on U.S. exchanges, Wall Street remains bullish on the company and its future. The median price target on BIDU stock is currently $316.90, which suggests the share price could rise 91% over the next year. The high price target on the stock is $399.64, which would be a gain of 141%. Analysts who cover the company clearly think that the company’s stock price should be where it was at the start of this year and the only thing holding it back is the Chinese government.
That said, there is no clear direction where the Chinese crackdown is headed or when it will end. The only thing known for certain is the China’s political leaders are intent on exerting political control over the country’s private sector and ensuring that no one company or its leaders become too powerful. In this difficult climate, investors are right to avoid Chinese stocks. However, if Baidu’s deeply discounted share price and upside potential are too attractive to ignore, then be sure to take a small position and plan to hold it for the long haul. It could take years for BIDU stock to recover.
Disclosure: On the date of publication, Joel Baglole held long positions in BIDU and BABA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.