Baidu Inc (ADR)(NASDAQ:BIDU) announced another solid quarter, with beats on the top and bottom lines. Revenues jumped by 29% to $3.62 billion and earnings came to $2.29 per share. On the news, BIDU stock is up about 4.5%.
Yet the shares are still about 13% off the 52-week highs. Of course, the recent correction in the equities markets has taken a toll on BIDU stock.
But for investors with a long-term focus, there should be opportunity for much more upside. No doubt, a big key is the focus on AI (Artificial Intelligence).
BIDU Stock And The Growth Drivers
BIDU has taken bold steps to restructure the company. A big part of this has been to unload non-core businesses, such Baidu Deliveries and the mobile games division. This is certainly important as the competitive environment is fierce in China, with operators like Alibaba Group Holding Ltd (NYSE:BABA) and Tencent Holdings Ltd (OTCMKTS:TCEHY). So it is important to have more of a focus on growth businesses.
Besides, the divestures will mean bringing in more cash. And it looks like the process is far from over.
As for the growth opportunities, BIDU is going all-in on AI (Artificial Intelligence). Here are the two key platforms:
- Apollo 2.0: This is an open source system for self-driving cars and it supports technologies from companies like NVIDIA Corporation (NASDAQ:NVDA), Intel Corporation (NASDAQ:INTC) and NXP Semiconductors NV (NASDAQ:NXPI). So far, Apollo has 165,000 lines of code and about 65,000 lines are being added every quarter. The platform also has over 90 auto partners like Ford Motor Company (NYSE:F) and Daimler AG (ADR)(OTCMKTS:DDAIY). Oh, and there is even a $1.5 billion venture capital fund to help bolster the ecosystem.
- DuerOS 2.0: This is the foundation for voice-assisted technology for smart devices and chat bots. The platform has over 130 partners and more than 7,000 developers.With all this technology, BIDU is developing its own hardware, such as a smart speaker that is similar to Amazon.com, Inc.’s (NASDAQ:AMZN) Echo as well as two robots. The company has also announced it plans to launch a self-driving bus this year a fully autonomous passenger car by 2021.
But AI is also important for BIDU’s core search business. Already the company has used the technology to improve the personalization of the feed, which has improved engagement.
BIDU Stock and Video
A potential catalyst for BIDU stock — for the near-term — is the planned IPO of the company’s video business, called iQIYI. It has over 500 million MAUs (Monthly Active Users) and about 10% are paying customers — making it the largest in China. Keep in mind that the service is the only one to license content from Netflix, Inc. (NASDAQ:NFLX).
The IPO is likely to garner lots of buzz, which should help bolster BIDU stock. But the deal should also allow for better monetization of the asset. Hey, just look at the performance of NFLX, which is up 87% during the past year.
Bottom Line on BIDU Stock
The main search business is somewhat mature, but it should generate double-digit growth for some time. Note that there are roughly 460,000 active online marketing customers. The search business is also a huge cash generator. During the past year, BIDU posted EBITDA of $3.59 billion, up 48% on a year-over-year basis.
It’s true that Baidu stock is not cheap, with a price-to-earning ratio of 29X. But then again, the shares deserve a premium because AI is a critical strategic bet and is likely to help sustain the growth rate.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
