Baidu (NASDAQ:BIDU) reported wonderful Q3 2022 outcomes, beating analyst estimates almost about each income and earnings. Furthermore, with the tailwind of an bettering COVID state of affairs in China, administration additionally gave an upbeat outlook for This autumn and going into 2023.
Personally, I stay tremendous bullish on Baidu inventory – each as a perform of valuation and future potential anchored on AI enterprise initiatives. And on the backdrop of EPS upgrades, I increase my goal value for Baidu inventory to $256.90/share, as in comparison with $237.80/share prior.
For reference, Baidu inventory is down about 25% YTD, as in comparison with a lack of roughly 20% for the S&P 500 (SP500).
Stronger Than Anticipated Q3 Outcomes
Though Baidu’s September quarter was nonetheless pressured by COVID headwinds and different macroeconomic challenges, the web large posted robust outcomes – beating analyst consensus estimates almost about each income and earnings.
During the period from July to the tip of September, Baidu generated whole revenues of roughly $4.57 billion, which compares to about $4.48 billion for a similar interval one 12 months earlier (10% 12 months over 12 months progress), and $4.15 billion for Q2 2022 (10% quarter over quarter progress). Analyst had anticipated income of about $4.51 billion ($60 million beat)
Throughout Q3, Baidu additionally improved profitability and reported working revenue of $747 million, representing a 130% year-over-year progress versus the identical interval one 12 months earlier, and a 56% quarter over quarter progress as in comparison with Q2.
Adjusted internet revenue expanded about 4.5% year-over-year, to $4.2 billion; and EPS got here in at 96 cents, which is roughly 6 cents greater than what analyst consensus anticipated. Earnings per ADS got here in at $2.37, which beat analyst consensus estimates by 12 cents.
Different highlights for the quarter embody:
Share buy-backs: In the course of the September quarter, Baidu returned $272 million to shareholders, which interprets into an annualized fairness yield of roughly 2.5%.
AI Cloud income expanded by roughly 25% 12 months over 12 months and now accounts for nearly 30% of the web large’s whole revenues. Furthermore, Baidu reported that the corporate’s ACE sensible transportation options are actually adopted in 63 cities, and have reached a cumulative contract worth of about RMB630 million.
Clever Driving: Baidu’s robo-taxi platform Apollo Go accomplished roughly 474K rides in Q3 2022, which displays a 311% 12 months over 12 months progress and a 65% quarter over quarter progress.
Cellular Ecosystem: In Q3, Baidu App’s MAUs grew to 634 million, which is a 5% 12 months over 12 months improve versus Q3 2021.
Reflecting on robust Q3 outcomes, Baidu co-founder and CEO Robin Li commented: (emphasis added)
Baidu Core delivered a strong set of monetary and operational ends in the third quarter, regardless of the continued challenges posed by the COVID-19 resurgence. Baidu Core’s income resumed optimistic progress, pushed by a gradual restoration of our on-line advertising enterprise and the regular progress of our AI Cloud income. Notably, we continued to make important progress in clever driving. On the one hand, Baidu Apollo’s auto options continued gaining recognition amongst main automakers. However, Apollo Go continued scaling up its operation, finishing greater than 474,000 rides within the quarter, additional strengthening its main place within the world autonomous ride-hailing market
Trying forward, we anticipate our cellular ecosystem to proceed producing robust money move and fund our funding in AI Cloud and clever driving, which can assist preserve our management within the new AI enterprise and drive long run enterprise progress.
Confidently Stepping Into This autumn And Early 2023
With the COVID lockdowns easing, Baidu administration voiced a optimistic outlook for This autumn 2022 and early 2023. Within the analyst Q&A session following Q3 outcomes, Baidu CEO Robin Li said:
In Q3, Baidu Core advert income was down 4% year-over-year, however improved from the second quarter’s 10% year-over-year decline, as macro has improved steadily since June. Encouragingly, revenues from healthcare and retail recorded optimistic year-over-year progress within the quarter.
And following a query from Alicia Yap (Citigroup) how analysts ought to take into consideration the restoration in promoting income, Robin Li added:
I feel the short-term will in all probability nonetheless be fairly unstable, however the economic system ought to enhance within the mid-term and past. China has been preventing in opposition to this COVID for nearly three years and the nation has been gaining expertise.
Our revenues are very delicate to COVID management measures …
… So, as soon as COVID and macro conditions enhance, our advert revenues from totally different verticals similar to journey, franchising or native companies ought to rebound.
Baidu’s confidence round This autumn and 2023 is according to what analyses of main funding banks. With zero-COVID restrictions lifting, Goldman Sachs sees China’s economic system develop by 4.5% in 2023, and Morgan Stanley estimates GDP progress for 2023 at 5.4%.
Though analysts are steadily turning into an increasing number of bullish on China’s macro outlook, estimates for Baidu stay – in my view unreasonably – depressed, and have solely just lately began to tick upwards.
Goal Worth: Increase To $256.90
Anticipating a pointy financial rebound in China, which strongly helps Baidu’s promoting enterprise, I estimate that Baidu’s EPS in 2023 will possible develop to someplace between $9.80 and $11.20. Furthermore, I additionally increase my EPS expectations for 2024 and 2025 to $12.44 and $13.55, respectively.
I proceed to anchor on a 4.5% terminal progress fee, in addition to on a ten% price of fairness.
Given the EPS upgrades as highlighted beneath, I now calculate a good implied share value of $256.90
Beneath can also be the up to date sensitivity desk.
Dangers and Headwinds
As I see it, there was no main danger replace since I initiated protection on Baidu inventory. Thus, I want to spotlight what I’ve written before. Nevertheless, though the headwinds persist to some extent, please notice that sentiment surrounding to all of those danger buckets seems to be bettering.
First, the economic system in China is presently pressured by a number of headwinds together with inflation, real-estate disaster and COVID-19 lockdowns. If the Chinese language economic system would sluggish greater than what is anticipated and priced in, traders ought to regulate expectations for Baidu’s quick/mid-term enterprise monetization accordingly.
Second, China’s web/tech corporations are strongly uncovered to regulatory danger. Whereas the worst appears to be behind us, the elevated danger publicity persists.
Third, a lot of Baidu’s share value volatility is presently pushed by investor sentiment in the direction of Chinese language ADRs and danger property. Thus, Baidu inventory value may present robust value volatility although the corporate’s enterprise fundamentals stay unchanged.
Baidu inventory is up roughly 31% since I’ve argued that the inventory may rebound quick and aggressively. Though this efficiency is appreciable, Baidu inventory has nonetheless extra room to go – particularly with the COVID reopening in China supporting the corporate with a powerful elementary tailwind.
Anchored on a powerful Q3, in addition to assured administration commentary for This autumn 2022 and early 2023, I’m assured to reiterate a ‘Purchase’ advice for BIDU.