How High Could Baidu Stock Go?

Baidu (NASDAQ:BIDU) is one of China’s largest tech companies and its largest provider of internet search services. Filling a role similar to Google in the West, Baidu has come to dominate the country’s domestic internet.

Shares of BIDU, though, have performed poorly over the last year, and investors today may have a rare opportunity to buy an undervalued tech giant. What does the future for Baidu hold and is the stock’s growth potential worth the risk of buying it?

The Argument for Baidu’s Undervaluation

Baidu has lost almost 20% year-to-date, and this sudden dip in price creates potential conditions for undervaluation.

With prices having fallen so much, Baidu’s multiples look very appealing. The stock trades at 1.8x sales, an unusually low multiple for a high-growth tech company. Just as surprising is the 9.8x forward earnings multiple, yet again quite low for a tech giant of Baidu’s sort.

In large part, the reasons for this drop in value are performance-based. For the full year of 2023, the company reported revenue growth of 9%. While still fairly impressive, this is a far cry from the kind of growth the company was able to achieve even a few years ago. In 2021, for instance, two of the four quarters saw revenues rise by more than 30%.

What could still lead to a conclusion of undervaluation, though, is the fact that Baidu is increasingly becoming China’s AI major.

The company’s AI chatbot, named “Ernie”, has attracted some 200 million users and is the most likely Chinese contender to ChatGPT.

Right now, the company is investing large amounts of money into developing its AI capabilities. The costs of these investments will likely set the stage for much higher earnings later on.

By 2030, the value of the AI market in China is expected to rise to over $100 billion. Between now and then, experts believe that the market’s compounded growth rate will exceed 20% annually. If Baidu can solidify an early lead in AI, its existing market dominance and resources could allow it to become the prime beneficiary of this growth trend.

Macroeconomic Risks From China

Even though Baidu looks like a good investment on paper, it’s worth acknowledging that the company is subject to the risks of doing business predominantly in China. A combination of debt worries, interference from the central government and weak economic growth in the country has put pressure on China’s stock market.

A recent analysis found that the market capitalization of Chinese companies trading in the US has fallen by about 17.5% since 2022, a period during which American stocks have performed extremely well.

Unfortunately, conditions in China may not improve in the near term. The IMF projects slowing economic growth in China through 2028, and the country is rapidly becoming less friendly to foreign businesses.

These headwinds may well keep Chinese stocks in general down, but it’s usually possible to find at least a few companies that buck broader trends.

Chinese Stocks Are Down, But Baidu Is Profitable

Even with investors souring on Chinese stocks, it’s hard to ignore Baidu’s combination of profitability and strong financial footing.

In the last 12 months, the company reported $2.86 billion in net income and a 15.1% net margin. Baidu’s debt-to-equity ratio is also a sustainable 0.2, protecting the company from some of the debt-related concerns that have plagued the wider Chinese stock market.

Even better for investors is the fact that Baidu’s earnings are likely to keep rising. Over the next 3-5 years, analysts project earnings growth of slightly over 22% for Baidu despite the weakness of the Chinese market overall.

In conjunction with expected forward revenue growth of about 6%, this puts Baidu on track to outperform most other Chinese companies and potentially deliver very good returns for its investors.

Baidu also boasts a strong moat that will likely keep it safe from competitors. Due to China’s tech policies, the company is effectively insulated from international competitors. Google, for example, pulled its search engine from mainland China in 2010.

Domestically, Baidu faces little competition and dominates online search so thoroughly that the emergence of a meaningful alternative appears unlikely.

So, How High Can Baidu Stock Go?

The average analyst price forecast for the stock is $173.73, a gain of more than 80% from present levels. More than 90% of analysts rate BIDU as a buy, further reinforcing Wall Street’s support for the stock.

Because of the current climate for Chinese stocks, it’s hard to say when or to what degree the market will correct BIDU to account for its strong growth potential. What does seem fairly clear is that the stock is undervalued and will likely rise both in the short term and over the longer term as earnings grow.

Using discounted cash flow analysis, it’s possible to come up with at least some idea of what BIDU shares are worth. The company earned $7.72 per share over the past year. Using this baseline, expected 5-year growth of 22% at a discount rate of 10% corresponding to the rough historical return rate of the S&P 500, BIDU shares would be worth about $182.78.

Furthermore, BIDU should continue to rise above this level as AI development costs begin to translate to higher earnings beyond the 5-year mark.

As these investments pay off, it’s quite likely that investors are likely to see BIDU surpass the $200 within a few years. This would still be well below its highest historical closing price of $339.91 during the heights of early 2021.

While investing in Chinese stocks is inherently fraught with challenges given the country’s economic struggles, Baidu looks like a stock that could defy macroeconomic gravity and provide investors with strong returns.

Even though it looks quite appealing, investors may want to hedge their bets by taking on small positions in the stock in order to capture the potentially market-beating returns Baidu may offer while insulating portfolios from excessive risk in the event that conditions in China deteriorate enough to impede the company’s growth.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.