- Chinese economy is widely seen rapidly recovering
- First mover advantage in Generative AI with ‘Ernie-bot’
- Significant upside on a sum-of-the-parts valuation from $136.69
Everyone seems to be talking about AI (artificial intelligence) and how to invest in this megatrend, and analysts believe Baidu (BIDU:NASDAQ) could be a great place to start.
Following a call with investors, Mizuho analysts believe there are multiple catalysts ahead for the company, levers which could spark a near-40% rally in Baidu’s share price to $190. That’s roughly in line with the price target consensus of the 14 analysts that cover the stock (14), according to Zacks data, from a range of $138 up to $234.
BAIDU, WHO IT IS AND WHAT IS DOES
Baidu is the Chinese search engine-turned-AI company that used to be compared to Alphabet’s (GOOG:NASDAQ). It was one of the BATs trio of Chinese megatech companies alongside Alibaba (BABA:NYSE) and Tencent (0700:HK).
According to Mizuho, there are ‘several idiosyncratic drivers’ that go beyond China’s expected macro recovery, and the company remains Mizuho’s China internet top pick.
‘First, the company has the first-mover advantage in Generative AI with the launch of Ernie-Bot, which has features comparable to ChatGPT, leveraging Baidu search data and machine learning,’ wrote the analysts. The analysts believe this is a key reason why the valuation discount between Baidu and Alphabet could narrow.
They also stated that the firm anticipates Baidu will resume double-digit growth in cloud revenue with a clear path to profitability, and that, with ADAS (Advanced Driver Assistance Systems) still a strategic technology, they expect Baidu to benefit from adoptions by a growing number of vehicle manufacturers and accelerated backlog growth.
BOOST TO SOTP VALUATION
‘Both could lead to a sum-of-the-parts valuation that potentially adds about $55 a share,’ the analysts calculate.
Mizuho says it expects Baidu to remain laser-focused on margins. ‘For advertising, we believe the company plans to maintain high margins,’ even if that implies sacrificing volume while the economy slows, but in AI Cloud, they see profitability arriving sooner than currently expected.
‘We believe Baidu could reach profitability in one to two years, down from about three years currently anticipated, as the company benefits from the multiple tailwinds we described earlier, they added.
