Baidu: Why I Might Be Adding To This AI Leader

Kevin Frayer

Investment thesis

While Baidu (NASDAQ:BIDU) has had a reliable twelvemonth successful 2022, I deliberation that done 2023, nan company's halfway hunt business should retrieve arsenic nan Chinese system strengthens and business activity gains traction pinch nan relaxation of tough Covid-19 measures.

In nan long-term, I spot Baidu arsenic a halfway AI business fixed its strategical attraction connected AI since 2016. I deliberation that its advancement frankincense acold pinch Ernie and nan AI Cloud business has been great, which will thief heighten nan halfway hunt business arsenic well.

Apollo brings a unsocial EV and autonomous driving opportunity to Baidu, leveraging its spot and expertise successful software, AI and exertion to leapfrog title successful nan space.

I person written an earlier article astir AI Cloud and Baidu's EV and autonomous driving opportunity which tin beryllium recovered here.

AI activity in China

Since Google's (GOOG) (GOOGL) Bard merchandise connected February 6, galore different exertion companies successful China announced that they excessively are successful nan process of processing akin AI products and person plans to merge ChatGPT-like features into their businesses.

Baidu was nan first to merchandise news connected February 7 that it plans to decorativeness its soul testing of its ChatGPT style project, Ernie Bot, successful March. There are reports stating that Baidu plans to make this work a standalone exertion and these features will beryllium slow merged into its Baidu hunt engine, helping make much applicable hunt results.

Other companies that announced plans to incorporated ChatGPT features into their businesses see Alibaba (BABA), JD.com (JD), NetEase (NTES) and Tencent (OTCPK:TCEHY).

For Alibaba, it states that generative AI and ample connection models person been its attraction since 2017 erstwhile it started DAMO. It disclosed that it was successful nan useful of creating a rival to ChatGPT, which is presently undergoing soul testing.

For JD.com, it besides plans to motorboat its ain ChatGPT-style merchandise that will beryllium called ChatJD, pinch focuses connected unit and finance and it will person nan expertise to person quality to machine speech and make content.

NetEase besides announced that its acquisition business, Youdao (DAO), plans to merge contented that is AI generated into its acquisition service.

Lastly, Tencent besides stated that investigation is successful progress, and it has plans for ChatGPT-style and AI generated content.

Apart from nan companies listed above, I judge that different Chinese exertion companies for illustration Huawei and iFlytek are processing akin products.

Some examples of nan Chinese exertion companies' AI instrumentality learning level see JD.com's DExplore Dream Team's Vega, Tencent's RoBERTa, Alibaba's PAI , Huawei's NEZHA.

Baidu's advantage successful AI technologies

In China, Baidu has been astatine nan forefront of nan improvement of AI technologies, fixed its galore years of acquisition successful nan improvement of exertion successful nan abstraction and nan rich | expertise they person connected AI technologies.

This each began successful 2016 erstwhile Baidu changed its strategical attraction to AI. Here is an excerpt from nan CEO successful nan 4th fourth 2016 net call:

In 2016, we began to spot glimpses of AI revolutionizing nan Internet and accepted industries. The PC era and nan emergence of mobile complete nan past 4 aliases 5 years are successful our rearview mirror. We are now surviving and breathing nan era of artificial intelligence. We judge that AI is nan caller electricity, which will toggle shape manufacture aft industry, caller applications and products that we person yet to moreover imagine, and fundamentally, alteration really users interact pinch technology. AI represents an tremendous opportunity and Baidu is primed to lead nan AI gyration successful China, arsenic a consequence of years of finance and our position astatine nan intersection of Big Data, exertion and search, arsenic good arsenic our entree to nan champion R&D talent successful China and globally.

To prehend this opportunity, we person continuously shifted our strategy, organization, and resources to AI. And we proceed to summation manufacture recognition. Launched past September, our artificial intelligence platform, Baidu Brain, is already deployed crossed astir each of our products including Search, News Feed, Maps, Nuomi, and PostBar to sanction but a few.

Since then, pinch astir 6 years of finance attraction successful AI and heavy learning, I deliberation that it is nary astonishment that Baidu was nan first successful China to denote an AI chatbot work akin to OpenAI's ChatGPT.

Baidu's Ernie model

Baidu's sanction for its AI bot is Ernie, which represents "Enhanced Representation done Knowledge Integration." Ernie is simply a earthy connection processing ("NLP") deep-learning exemplary that Baidu introduced 2019.

Ernie is simply a pre-training model that uses sequential multi-task learning to gradually build and study done pre-training tasks. Baidu Research announced connected 2019 that ERNIE had achieved a caller level of capacity connected GLUE, and it was nan first model globally to people complete 90 successful position of nan macro-average score, pinch a people of 90.1.

Baidu launched Ernie 3.0 successful July 2021, which is nan company's unified model for pre-training large-scale knowledge enhanced models. The exemplary was trained pinch 10 billion parameters connected a 4TB corpus consisting of plain texts and a large-scale knowledge graph.

Ernie 3.0 Titan was past launched successful December 2021. It is simply a pre-training connection exemplary pinch 260 cardinal parameters and produces bully results successful some earthy connection knowing and generation. Baidu thinks that Ernie 3.0 Titan is nan first knowledge enhanced multi-hundred cardinal parameter exemplary globally.

Baidu's AI business opportunity

The first business that Baidu's AI technologies and Ernie are apt to use is nan hunt business. Ernie has already been incorporated into Baidu's online products and services specified arsenic search, newsfeed, smart speakers, amongst different things.

In Baidu's 1Q19 earning result, guidance noted that its IME (mobile keyboard) launched an AI type that enables mixed sound input pinch English, Mandarin and different dialects, existent clip translator and augmented reality emoticons, and that much than 60% of Baidu IME AI type users opted for sound input.

In addition, nan usage of AI tin amended nan hunt personification acquisition by filtering and eliminating misleading and low-quality advertisements and content. Baidu announced that successful nan first half of 2019, much than 1 cardinal of specified contented and tens of billions of inappropriate images were filtered.

Secondly, Ernie tin besides beryllium incorporated into Baidu AI Cloud to amended business applications. For example, Baidu improved nan predictability successful nan inferior assemblage utilizing AI arsenic a consequence of faster ocular recognition. Also, successful nan banking and carrier sectors, AI unreality enables much scalable operations and making usage of nan immense magnitude of information captured successful these businesses. Ernie presently covers 11 industries, including finance, utilities and manufacturing, amongst others.

Lastly, Baidu could merchandise their AI exertion to support 3rd statement applications, whether it involves gaming, designers aliases coding.

Baidu Core

In position of Baidu App personification metrics, contempt its ample personification base, nan MAU grew 8% twelvemonth connected twelvemonth to 646 cardinal and DAY grew 5% twelvemonth connected twelvemonth to 240 million, arsenic of December 2022 based connected information from Questmobile. As of December 2022, full clip spent was up 8% twelvemonth connected twelvemonth to 319 cardinal minutes, while nan mean personification clip spent reached 494 minutes, which is level twelvemonth connected year.

Based connected a Reuters report, it was stated that critically sick Covid-19 cases successful China was down 72%, from nan highest of 128,000 cases connected Jan 4 to 36,000 cases connected Jan 23. It was besides stated that complete 80% of China's 1.4 cardinal organization had already been infected.

With nan drastic alteration successful nan argumentation for Covid-19 successful China, I deliberation we will spot that online advertisements were apt impacted by slower economical activities arsenic a consequence of nan earlier tighter measures, which has been mostly priced in, successful my view.

In position of 2023's outlook, I expect that nan first 4th could spot a slower start, but business momentum should build, particularly aft nan Lunar New Year.

Baidu Cloud

Baidu held its yearly Create AI Developer Conference connected January 10th to showcase its latest developments successful AI and unreality technology. Mr. Robin Li, Baidu's CEO and president reiterated that nan institution is 1 of nan fewer companies that person invested heavy into AI and nan cloud. Baidu's AI exertion model is expected to target and little nan technological obstruction for nan take of AI.

Baidu's unsocial integration of AI and unreality enables much companies to entree AI technology, which helps to amended operating ratio for customers. Baidu continues to beryllium recognized arsenic a leader successful AI nationalist cloud, conversational AI and AI business value power verticals, based connected 3rd statement research.

Baidu made 2 awesome moves successful 2022 successful its AI unreality business. The first was nan preamble of integration of unreality and AI 3.0 frameworks and nan in-house developed AI infrastructure AI Stack. Baidu AI Stack represents Baidu Cloud's AI IaaS, which integrates its Kunlun chips and optimizes nan capacity successful AI compute, storage, and acceleration. On AI PaaS layer, combining PaddlePaddle heavy learning model and Wen Xin model, Baidu besides offers full-chain solutions for firm exemplary development.

All successful all, Baidu is good positioned to thief companies little nan obstruction to introduction into adopting AI.

Baidu's autonomous driving

During nan Baidu Create Conference connected January 12, Apollo unveiled nan caller BEV autonomous driving sensation solution. This solution intends to amended nan discovery capabilities of intelligent vehicles by utilizing precocious sensors for illustration RIDAR and HD devices, which supply a amended cognition of nan surrounding situation than quality vision. The information collected by these sensors will beryllium fed into an integrated exemplary to make much meticulous results. The BEV solution besides supports clip bid integration to analyse information complete time, resulting successful much unchangeable and reliable results.

Apollo besides introduced nan UniBEV solution, which integrates aggregate sensors, models, and missions to supply end-to-end autonomous driving solutions. Baidu besides unveiled its smart roadworthy OS, which features 5 cardinal functions, including AI mediate office, navigation services, communication, open-source exertion work capability, and hardware connection.

In April 2021, Baidu launched nan Apollo AIR autonomous driving strategy for information integration of vehicles and nan roadworthy environment, which supports unfastened roadworthy sensation astatine L4 autonomous driving level. This exertion has besides been applied successful municipality assistance driving, smart accusation control, and valet parking successful complete 60 cities successful China by nan extremity of 2022.

Valuation

Using a sum of nan parts model, I deduce my 1-year target value for Baidu fixed that nan institution has respective different business segments increasing astatine different rates. My presumption for Baidu AI unreality business is simply a 4x aggregate connected 2023 income and 8x 2023 P/E for nan halfway hunt business, while I usage a DCF exemplary for nan Apollo and intelligent conveyance business. Lastly, I usage nan adjacent worth of its investments based connected their astir caller valuation and use a 30% holding institution discount.

My 1-year target value for Baidu is $209, representing 40% upside from existent levels. I deliberation that Baidu looks charismatic astatine existent levels.

Risks

Weak macro backdrop

I deliberation that contempt China's re-opening and relaxing of restrictions, location is nan consequence that if nan world macro backdrop weakens, this could impact business and user sentiment successful China. In particular, its hunt business will beryllium affected fixed nan little advertizing walk successful specified a scenario, providing near-term headwinds to nan business.

Delay successful advancement of motorboat of EV and autonomous driving milestones

Baidu continues to execute connected its autonomous driving plans. That said location are risks that location mightiness beryllium hold successful nan motorboat aliases nan institution whitethorn person problems ramping accumulation up. There is simply a request to make judge that nan institution executes good connected its autonomous driving business timeline fixed nan expanding relevance for Apollo successful Baidu's valuation.

Conclusion

All successful all, I deliberation that Baidu should spot request for ads retrieve done 2023 arsenic nan economical activity successful China kicks disconnected aft a agelong play of restrictions. This will beryllium affirmative for its halfway hunt business successful nan near-term.

In nan long-term, Baidu is focused strategically connected investing successful AI and its advancement that it has been making successful its AI Cloud business and Ernie is encouraging, which will person semipermanent benefits to its halfway hunt business arsenic well. Lastly, Apollo presents a unsocial EV and autonomous driving opportunity to a institution traditionally known much for search. My 1-year target value for Baidu is $209, representing 40% upside from existent levels.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

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