3 Reasons Baidu’s Rally Will Continue


Could Baidu shares be a coiled spring ready to surge higher? Here are three reasons to be bullish on the stock:

Among the BAT companies of Baidu Inc (NASDAQ: BIDU), Alibaba Group Holding Ltd (NYSE: BABA), and Tencent Holdings Ltd (SEHK: 700), Baidu shares have done the worst in the intermediate term. 

Baidu shares have fallen out of favor due to decelerating revenue growth. Concern over future potential search competition from ByteDance, which has around 1.5 billion users, is another factor. 

Can what goes down, go up as well? Is Baidu stock a coiled spring ready to rally higher as the market gives more credit to its value?

Here are three reasons why I believe Baidu shares can be a good investment going forward:

Potential for Baidu to list in Hong Kong

Alibaba recently debuted in Hong Kong, with its stock price popping in the opening day. The company raised billions of dollars in capital. Demand for Alibaba was oversubscribed many times over, indicating strong demand from Chinese investors. 

Given Alibaba’s successful listing, the capital market for ‘coming home’ debuts in Hong Kong is now open after being closed for months due to the protests. 

An open market and Alibaba’s return to Greater China could foreshadow the potential return of Baidu. If Baidu lists in Hong Kong, it could potentially gain a higher valuation like Alibaba. The company could raise capital to help it pivot into artificial intelligence. If this happens , Baidu also could invest more heavily in search to fight off ByteDance. 

Better Quarterly Results

After several quarters of bearish numbers, Baidu’s third-quarter results were encouraging. Sales rose 7% sequentially to RMB 28.1 billion and were flat year-on-year. And growth might continue to pick up. Baidu management expects sales from Baidu core to grow between 0% to 6% year-on-year for the fourth quarter. 

The results seemed to indicate that the ad market in China is improving. If the ad market improves and Baidu maintains its search market share, Baidu could have a string of better quarters ahead. 

Baidu’s Artificial Intelligence Efforts

Baidu has been trying to pivot into ‘AI’ for a while, transitioning so that its main products are AI based. Yet, due to the capital and time needed to make self-driving car software and to capture enough market share in smart speakers to successfully monetize it, Baidu’s pivots have mainly hurt its margins. 

While those efforts continue to be produce losses, the company has started to make more progress in both areas. 

In the third quarter, Baidu gained more autonomous driving licenses across China, and the company’s self-driving car software powered China’s first robotaxi pilot program in September. Although it is by no means market ready, Baidu’s self-driving car software efforts continues to make progress. 

In terms of AI operating systems, monthly voice queries of Baidu’s smart device operating system, DuerOS, rose 4.5-fold year-on-year to surpass 4.2 billion in September. The company’s Xiaodu smart speakers powered by Baidu’s DuerOS were number one in terms of shipments in the second quarter.

Once Baidu gains enough of a hold in the smart speaker market, it can monetize the asset better, and Baidu’s financial results will improve. 

A Word of Caution

It’s hard to call the bottom on a stock. 

The market is often very good at predicting events in advance, and Baidu’s bad stock performance could correctly predict future fundamental deterioration. 

Although it might have a lot of cash and cash equivalents on its balance sheet and a lot of potential, Baidu’s search performance could worsen due to competition from ByteDance and the company’s efforts in self-driving could not pay off as anticipated. 

Baidu could be a value trap, and the stock could continue to lag its BAT peers. Baidu shares could still be risky as a result. 

Foolish conclusion

Baidu shares haven’t done well as its sales growth slowed and competition from other companies increased. Baidu’s stock performance suggests future potential deterioration. While the market is often right in predicting events in advance, there are many reasons to believe that it could potentially change its mind on Baidu and shares can go higher.