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Baidu: The Case For Upside Revaluation In 2023

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Yongyuan Dai

Shares of Baidu (NASDAQ:BIDU) person seen a beardown upside revaluation since reaching a debased successful November which has been related to a number of factors including (1) Improving investor sentiment, (2) The reopening of China’s system aft a sadistic 3-year agelong of COVID-19 lockdowns and (3) The company’s February announcement of a $5B banal buyback that is expected to beryllium completed by nan extremity of FY 2025. Despite nan upward revaluation, shares of Baidu are still attractively valued. I judge nan consequence floor plan is still favorable and if Baidu sees a betterment successful nan important online advertizing marketplace successful FY 2023, nan exertion institution could spot a return to affirmative apical statement maturation rates and an moreover higher valuation!

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Disappointing FY 2022 capacity for Baidu, but nan business could soon improve

Baidu faced a batch of headwinds successful nan past 3 years. First, Chinese regulators unleashed an unprecedented crackdown connected nan large tech assemblage successful 2020 and punished it for transgressions of nan past. Chinese tech companies grounded to study past transactions, arsenic an example, and received fines from regulators arsenic good arsenic a stricter regulatory model arsenic a result.

Then, erstwhile COVID-19 deed successful 2020, maturation successful nan Chinese system slowed and nan Baidu knowledgeable a slowdown successful its business, successful portion because marketers person pulled backmost from advertisement spending. Baidu makes nan mostly of its money from online advertisement sales, since Baidu owns China's astir celebrated hunt engine.

Online trading successful China has seen headwinds successful FY 2022, successful portion owed to deteriorating shaper and user sentiment successful a state that escalated its COVID-19 lockdowns past year. Primarily for those reasons, Baidu reported a 7.4% driblet successful online trading revenues to 74.7B Chinese Yuan ($10.8B) successful FY 2022. Online trading revenues accounted for 60.4% of Baidu’s revenues. Since online advertizing remained Baidu’s largest business, nan slowdown successful advertisement spending successful nan Chinese online marketplace resulted successful a 1% diminution successful Baidu’s consolidated gross growth: Baidu reported revenues of 123.7B Chinese Yuan ($17.9B) successful FY 2022. The Chinese tech company, however, remained solidly profitable pinch operating income of $15.9B Chinese Yuan ($2.3B), showing 51% year-over-year growth.

 Baidu

Source: Baidu

Despite nan slowdown successful integer advertising, location are bully reasons to judge successful a rebound for Baidu successful FY 2023, particularly now that nan Chinese system reopened successful Q1’23. After 3 years of lockdowns location is simply a batch of pent-up request that will beryllium unleashed by some consumers and businesses and Baidu could surely beryllium among those companies that use from a surge successful user spending. Since China's system started to reopen only successful January, investors will still person to hold until nan merchandise of Q2'23 net earlier they tin perchance spot immoderate betterment effects successful Baidu's online trading segment.

But I judge things are moving successful nan correct direction. At nan opening of March, China’s manufacturing purchasing managers’ scale jumped from 50.1 to 52.6, indicating improving economical sentiment that follows straight from China’s reopening efforts successful January. A continual betterment successful mill activity and user spending would astir apt thief Baidu's advertisement income and apical statement growth.

 CNBC

Source: CNBC

$5B banal buyback

When Baidu reported FY 2022 earnings, nan institution announced a $5B banal buyback which, based connected a existent marketplace headdress of $52B, will let nan Chinese exertion institution to repurchase astir 9.6% of its outstanding shares. The buyback is expected to beryllium completed by nan extremity of FY 2025. While I americium mostly not a large instrumentality of banal buybacks -- because I judge astir companies do them incorrect by repurchasing shares erstwhile they are costly -- a banal buyback present makes consciousness since Baidu's shares stay attractively valued, contempt a near-doubling of nan banal value since November 2022.

Baidu’s valuation

Shares of Baidu are presently weighted astatine a P/E ratio of 11.8 X which is exceptionally cheap, successful my opinion. Baidu is presently trading 9% beneath its 1-year mean P/E ratio. Considering that Baidu is projected to turn EPS 14% successful FY 2023 and 15% successful FY 2024, and that nan system could present a powerful EPS catalyst successful nan adjacent 2 years owed to its reopening, I judge estimates could reset to nan upside. Additionally, Baidu's valuation is almost arsenic charismatic arsenic Alibaba's (BABA). Alibaba besides remains a apical betterment pick for maine successful 2023.

ChartData by YCharts

Risks pinch Baidu

There is simply a definite governmental consequence that comes pinch investing successful Chinese tech companies. Whether it is Baidu, Alibaba aliases Tencent (OTCPK:TCEHY), China’s companies person suffered awesome valuation declines complete nan past 3 years, mostly because China’s regulators tightened nan regulatory framework. Going forward, I will salary adjacent attraction to nan capacity of Baidu’s online trading business, which is still nan firm’s breadstuff and food operation. A diminution successful online trading gross maturation could beryllium a logic for maine to alteration my sentiment connected Baidu.

Final thoughts

I judge nan finance situation for Chinese exertion companies has greatly improved lately, successful portion because China has reopened its system aft a sadistic three-year lockdown. Because Baidu owns nan astir ascendant hunt motor successful China, Baidu could profit handsomely from a betterment successful online integer trading advertizing successful FY 2023 arsenic pent-up request gets unleashed and consumers and businesses unfastened up their wallets. The $5B banal buyback is an added prize and since nan banal is cheap, I spot further upside for Baidu's shares!

This article was written by

The Asian Investor floor plan picture

I look for high-risk, high-reward situations. Five largest portfolio holdings: AMD, Micron, Alibaba, Ethereum, PayPal. Early purchaser of cryptocurrencies. I unrecorded successful Thailand :)

Disclosure: I/we person a beneficial agelong position successful nan shares of BABA, BIDU either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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