Its stock doesn't screen well due to the complex corporate structure — the ventures, advertising business and investments should be valued separately — as well as the large number of non-earning but nonetheless valuable assets.
Net cash of about $20 per share and investments of about $40 per share comprise 40% of the market cap, valuing the core business — search and iQiyi combined — at x10-12 operating earnings. That could leave a significant margin of safety.
With a 75% market share and over a billion users feeding its algorithms, Baidu sports a near monopoly on internet search in China. This network effect gives shape to a huge and unreplicable competitive advantage, though it is admittedly facing several challenges.
In effect, the growth of advertising spending on news, entertainment and social media platforms — such as ByteDance's TikTok — is putting it under pressure. Baidu's longstanding focus on profit over user growth — which was praised back in the days — has backfired.
Unlike the "open" internet, apps offer rich environments for developers and advertisers. They have gained massive traction in China, where internet penetration has primarily been driven by mobile use. This is what makes the comparison between Google and Baidu a bit fallacious.
A specialist of "traditional" search, the latter is losing out and investors have come to view it as a melting ice cube. It is true that its market share in online advertising has gotten decimated, and that catching up with the likes of ByteDance or Tencent won't be easy.
Still, developing platforms that keep their audiences captive — and easier to milk out — is totally within Baidu's reach. It is investing heavily in content creation to capitalise on the popularity of video streaming, through both iQiyi — the Chinese Netflix — and YY Live.
As the old saying goes, it never rains but it pours. The recent $3.6bn acquisition of the YY Live's domestic business from JOYY came under scrutiny after short-seller Muddy Waters publicly attacked YY Live, which it deems "90% fraudulent".
Meanwhile, sales at iQiyi have slipped. The platform, which has also been targeted by short sellers, loses money and remains a significant drag on Baidu’s bottom line. Its model requires heavy spending on content, unlike the user-generated contents available on TikTok.
Finally, the congress has passed a legislation that requires Chinese companies to prove that they are not controlled by their government — and that enhances transparency in general — in order to maintain their U.S. listings. That could blow ill winds on Chinese tech titans.
All that being said, there is a lot to like at Baidu, starting with their wide portfolio of assets, competitive advantage on search and valuation. Assuming a very conservative 25% operating margin and multiple of x15 earnings, the ad business alone could easily be worth at least $120 per share.
Add the net cash and investments of $60 per share and you get a $180 "fair value", vs. the current share price of $140. All the other assets — iQiyi, Baidu Maps, Apollo, DuerOS, etc. — come free of charge, although even those that lose money must be worth something.
Apollo, for instance, is China’s national champion in autonomous vehicle technology. Per McKinsey, if the driverless-car phenomenon takes off in China — which has make artificial intelligence a national priority — the payoff could be in the trillions of dollars.
Valued on the same basis with direct comparables such as Waymo, Cruise or Argo, Apollo could be worth anything between $10 and $40 per share. Regarding DuerOs, China’s leader in voice recognition, Baidu founder Robin Li thinks that the ascent of smart speakers mirrors the rise of smartphones a decade ago.
Mr. Li is a highly respected figure and has a voice that counts in the tech industry. He still owns 16% of the company, which has ramped up its share buyback program last year — and will likely maintain or increase its pace this year.