Company Name: Baidu
Entry Price: $220
Target Price: $300
Projected Yield: 36.40%
Time Line: 9 months
Position Size: 2%
One of the largest China based tech companies, Baidu (BIDU.US) supplies web services, of which the flagship product is a search engine, with a market share of around 70%. Besides, this IT giant creates products and services for self driving cars and cloud computing. All Baidu's earnings come from the domestic market.
What's the Idea?
The idea lies in capitalizing on a stock, which can rise with AI and autopilot techs, as well as with an even better position in the Chinese market.
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Why Trade Baidu?
Reason 1: Autopilot Technologies
Starting December 2020, Baidu's market cap went firmly up, with the stock rising by 140% by mid February 2021,the core reason being merger and acquisition deals. Baidu is currently planning to start manufacturing electric cars, while working with companies that already have such experience, including Zhejiang Geely Holding Group, Guangzhou Automobile Group (GAC), and China FAW Group.
Previously, Baidu launched Apollo Go taxi robots in Cangzhou, a city with around 7M of population. The management sees Apollo Go as the world's largest car autopilot platform; it connects around 500 vehicles all over Chine and has already completed a few hundred passenger rides. Overall, taxi robots could be a very promising thing, especially for Baidu, as it has good potential for generating more sales.
With all that in mind, Baidu may well both compete with other large companies operating in the Chinese market, such as Tesla and Nio, and increase its market share. In the longer term, this may lead to less dependency upon the earnings coming from ads.
Reason 2: Ad Market Recovery and AI Development
Baidu's ad earnings dropped by 5% against the pandemic; this was in line with many other companies that had to cut their marketing expenses in 2020. KeyBanc affirms, however, that Baidu's ad earnings will be increasing starting this year, as the entire market is recovering after COVID-19. On the other hand, Baidu's management believes that Baidu Core (web services) earnings may already rise by 26% to 39% in Q1 2021.
Another growth driver lies in AI solutions, as Baidu may get more advantages with the digitalization that many Chinese industries are currently undergoing, as well as with new infrastructure projects.
Currently, Baidu is investing a lot of funds into techs, which includes AI product development, and this does reduce the net profit. In the short term, that may put the company under pressure; however, in a longer term, this should provide growth and better competitive edge.
Currently, Baidu is a leading AI company with a great web base, and is using its new solutions in cloud computing, self driving cars, smart transport, etc. Over the last quarter, the R&D costs rose by 19% to CNY5.70B, or USD$880M. However, these investments may well bring good ROI in the midterm.
Reason 3: Good Financial Performance
Baidu proved quite resistant against the COVID, as the earnings reached $16.40B, quite in line with the 2019 data.
The operating earnings amounted to $2.20B, which is twice as bigger compared to 2019, while the net profit came at $3,44B. All this is mostly due to the investment earnings.
With a stable financial position, Baidu has $104B in debt and $24.90B in liquid funds. The free cash flow (FCF) is stable, too, amounting to $2.90B over last year.
The ratios are quite low compared to the competition: P/S is at 4.7x, PE, at 22x, and P/FCF, at 17.8x.
The investment banks and companies raised their target price outlooks as follows:
- UBS Group: $400
- Citigroup: $324
- Mizuho: $350
- KeyCorp: $390
- Barclays: $400
- The Goldman Sachs Group: $385
Chinese regulations: In November 2020, China's Market Regulation Authority announced a bill that would drive the anti monopoly law even further, while in February 2021 the new regulations were released.
In mid March, Baidu and other 11 China based IT companies got fined, as they infringed that regulations. The fine amount for Baidu was CNY500,000; the reason was the acquisition of AiNemo, a company delivering solutions for smart homes.
US pressure: The Foreign Company Accountability Act signed by Trump, which drives Chinese companies away from the US markets in case the audit regulations are not complied with for three years in row, is still working, and Baidu may well suffer from it.
The above risks, paired with the overall negative market outlook, made Baidu stock drop by 43%. These risks may still generate some pressure in the nearest term, but the overall outlook is likely to get much better as soon as in just a few months.
How to Use the Idea
- Buy the stock at $220.
- Allocate no more than 2% of your portfolio for the transaction. To build a balanced portfolio, you can use the recommendations by our analysts.
- Sell the stock when the price reaches $300.
How to Buy Baidu?
If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.
After opening an account, you can buy shares in either of the following ways:
Freedom24 Web Platform: In the Web Terminal section, type BIDU.US (Baidu ticker in the NASDAQ) in the search box, and select Baidu in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.
Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type BIDU.US (Baidu ticker in the NASDAQ) and select Baidu in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.
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