I’ve always been fascinated by companies who prioritized AI as their core R&D. Baidu on this front is really misunderstood and to me, under appreciated and underestimated.
With more evidence coming that China has state-backed companies, in particular Huawei, we should not count the “Google of China” out just yet. It lost more than 20% of its stock market price in 2019.
Let’s face it in 2019 the economic slowdown in China, competition from other platforms, and tighter government regulations for the fintech, gaming, and healthcare industries all caused advertisers to buy fewer ads on Baidu. Baidu’s stock went as low as $94.00 in August, 2019, but today is showing significant gains.
Baidu’s Stock is Showing Upside in Early 2020
Baidu’s stock today is up 7% to $136 and is poised to climb higher. Here’s the deal:
Some of Baidu’s own other bets will start to pay off. Baidu continued to expand into other markets, including cloud services, driver-less cars, mini-programs, AI, voice search, and smart speakers. Within those newer businesses, smart speakers became a major growth engine for Baidu over the past year.
The pressure of losing mobile ad market share to ByteDance forces Baidu to innovate more. It’s so AI-heavy in R&D however the Chinese Government can’t let it fall too low. If Huawei got in the area of $75 Billion from the Chinese Government according to the WSJ, it’s not clear how much global companies like ByteDance, Alibaba and Baidu might get or be eligible to get sometime in the future.
China’s State Backed Dynasty of Tech Firms is Another Kind of Capitalism
China can drive state-backed firms who exhibit global potential for growth to increase its own economy and boost its technology sector, especially as it drives AI and the IoT forward. China’s AI sector is poised for radical innovation in China’s social credit system that is AI-centric. China has over a dozen strong AI startups that can scale to become significant players in surveillance capitalism.
However Baidu is like the granddaddy of China’s AI ambitions. With advertising lapsing, it needs to drive a Cloud product that can increase its profitability. It’s well positioned already in the AI-speaker space with Alibaba as the Chinese duopoly there.
After a messy 2019, where Baidu plunged nearly 70% in around a year, it has finally started to recover along with its results and I expect significant upside for this company and stock in 2020.
Baidu is an AI Company
Most people think of Baidu as the largest Chinese search engine, and while Baidu does have a dominant position in search through its Baidu search engine, it also operates in many other fields. Baidu is more diversified than most investors and analysts realize with future upside that has yet to hit a maturation point. In short, like Huawei, it’s an R&D powerhouse.
Baidu generated 73% of its revenue last quarter from its advertising business, which sells ads across its search engine and network of portals and apps. It needs to increase its focus on new sources of revenue in the 2020s.
Baidu’s streaming service iQiyi should continue to post strong revenue and user growth.
Amazon is expected to have a rather flat 2020, and that’s just what Baidu had in 2019 with Q3 earnings showing revenue of 28.08 billion yuan ($3.93 billion, according to the earnings release exchange rate).
The crux of its consumer AI ecosystem is DuerOS, an Alexa-like voice assistant with a growing list of skills. How dominant has it become? Baidu’s market share by unit sales in China climbed from just 2% to nearly 40% in a single year. Baidu has its hands in many pies, but AI is the central construct.
When we think of Chinese firms we can’t seem them as separate entities from the State. In some ways in China’s version of capitalism, they are more like extensions of it. The Chinese firm has been looking to diversify revenues, and reduce reliance on its core search business, by expanding into areas like driverless cars, artificial intelligence and streaming.
I believe in the 2020s, companies like ByteDance (Facebook clone), Luckin (Starbucks clone), Xiaomi (Apple clone) and Baidu (Google clone) will all mature incredibly.
Huawei and Alibaba are already reaching that kind of maturity. Meituan, JD.com, Ant Financial and ByteDance for instance, have aspects as firms that no Western company really approaches. Baidu being tethered to China’s AI ambitions however, is in a special category.
Revenue from iQiyi reached 7.4 billion yuan ($1.04 billion), up 7% year over year, while subscribers jumped 31%.
DuerOS hit 100 million users last August, doubled to 200 million in January, and doubled again to 400 million in July. Last quarter, Baidu stated that monthly voice queries on DuerOS had more than quadrupled annually to 4.2 billion. That’s probably more traffic than Google Assistant is getting. Which amounts to a lot of data.
Bottom line, don’t count Baidu out in 2020. With the advent of earbuds and voice search, the data can usher in an age of AI-consumer interface that has the potential to take market share away from mobile, even as 5G evolves. Baidu may be smaller than Alibaba or Tencent, but nobody would argue that it is less AI-centric and that’s always made it a sparkling B in the BAT of those companies.