Baidu with Nobias technology: Down 55%, Is It Time To Buy “The Google of China”?
We recently covered Alibaba (BABA) in a quarterly update article and it appears that it isn’t the only Chinese tech giant that is being discussed frequently by analysts. Another company that popped up on our radar recently, with regard to an increase in analyst chatter, is Baidu (BIDU). Much like Alibaba, Baidu shares have suffered in a major way throughout 2021 due to increasing regulatory pressure being put onto the biggest players in the Chinese technology space by the Chinese Communist Party.
Not only have growth prospects been hurt by regulation that we’ve seen in recent month, but investors/analysts alike have rising concerns about the variable interest entity structure, which is what allows foreign investors to gain access to chinese companies in the stock markets, being ripped apart, therefore, creating a lot of international bag holders for Chinese equities.
It’s true that fear surrounding the dismantling of the VIE ownership structure by Chinese leadership is speculative. However, the threat alone changes the risk/reward calculus related to stocks like BABA and BIDU. Yet, anyone familiar with the stock market knows that sentiment tends to move share prices too far, whether we’re talking about bullish rallies or bearish sell-offs. And, with that in mind, we wanted to take a look at what the credible authors who’ve published work on BIDU have had to say recently, now that the BIDU shares have sold off by 55%, relative to their prior 52-week highs set in mid-February. Due to this weakness, it appears that institutional investors have become more and more interested in the rebound potential of BIDU shares.
Debasis Saha, a Nobias 4-star rated analyst, recently published a report which highlighted the increased demand for BIDU shares within the hedge fund community. Saha said, “Prominent investors were betting on the stock. The number of long hedge fund bets rose by 38 recently. Baidu, Inc. was in 89 hedge funds' portfolios at the end of March. The all time high for this statistic was previously 72. This means the bullish number of hedge fund positions in this stock currently sits at its all time high.” This is an interesting trend because it’s often thought that big institutional money is what drives markets. However, it’s clear that not everyone in the institutional space is bullish on BIDU.
Richard Saintvilus, a Nobias 4-star rated analyst, published a Q2 preview piece earlier this week which pointed out that famed growth investor, Cathie Wood of Ark Investments, sold out of her large BIDU stake recently. Saintvilus said, “China’s regulatory crackdown has sparked fears among U.S. investors that foreign investors will flee Chinese stocks. Cathie Wood's ARK funds recently sold off Baidu shares, among other China holdings, for the same reasons.”
However, Saintvilus also touched upon the stock’s recent pullback, saying that a contrarian stance may be a reasonable one to take at the moment. He wrote, “This pullback, however, might be a good opportunity for investors who have been on the sidelines.” Saintvilus says that Bidu, which is often referred to as the “Google of China” offers compelling growth, even outside of its search engine assets, which include “a stand-alone artificial intelligence (AI) semiconductor capabilities, as well as streaming and autonomous vehicles.”
Regarding Baidu’s future growth potential, Saintvilus also points out that “with consecutive quarters of strong earnings that has yielded tons of cash flow, Baidu is ready to put its cash to work, promising to boost its investments by some 30% annually over the next several years.” Coming into the Q2 results, Saintvilus said, “Currently trading at around $163, Baidu still has a consensus Street price target of $308 which implies close to 90% upside.”
This highlights the high potential of a contrarian bet being placed at today’s relatively low share price levels. However, the bullish hedge fund outlook and the high consensus price target being placed on shares coming into the second quarter by Wall Street wasn’t enough to inspire a bounce back.
BIDU reported its second quarter earnings recently (on August 12th), beating analyst estimates on both the top and bottom lines. However, as Zheping Huang, a Nobias 4-star rated analyst, recently pointed out in a Yahoo Finance article, the company’s forward looking guidance disappointed investors, sparking the most recent leg of the stock’s sell-off.
BIDU shares have fallen roughly 7% since their August 12th report and Huang highlighted the fundamentals driving the move saying, “Baidu Inc. delivered a conservative outlook for the current quarter as a resurgent pandemic outbreak in China overshadowed the internet search giant’s push into newer arenas like cloud and smart devices.Revenue for the three months ended June climbed 20% from a year earlier to 31.35 billion yuan ($4.8 billion), compared with the 30.9 billion yuan of estimates. The company predicted sales of 30.6 billion yuan to 33.5 billion yuan for the September quarter, versus the 33.1 billion yuan seen by analysts, saying that the recent increase in Covid-19 cases across large parts of China left business visibility “limited.”’
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
In a separate Bloomberg article that Huang penned, he included the full quote, writing: “The Covid-19 situation in China is evolving and business visibility is limited,” Baidu said in a statement Thursday, adding that the preliminary view is subject to change. The stock market hates uncertainty, above all else, and anytime you have a management team offering guidance like this (however truthful and frank it may be) investors are likely to sell shares. And yet, even with this uncertain guidance in mind, when we look at the credible authors tracked by the Nobias algorithm, the vast majority of them remain bullish on BIDU shares.
Right now, 91% of credible authors maintain a bullish opinion. And, the average price target amongst these credible sources sits at $325.00/share, which is even higher than the overall Wall Street consensus. Today, BIDU trades for $159.63. Compared to the $325 average price target that we’re seeing, this implies upside potential of roughly 103.6%. Obviously that is a fantastic near-term return potential. It’s worth noting that analysts have been wrong about the direction of BIDU shares for most of 2021; however, it's undeniable that the risk/reward here is intriguing. Because of that, it appears that BIDU is a stock that investors with high degrees of intestinal fortitude (especially those who do not fear continued Chinese crackdowns on its tech sector) may want to consider. These shares certainly aren’t for the faint of heart, but it’s rare that we see such a large discrepancy between current share prices and the average price target of the credible analyst community tracked by our algorithm.
Disclosure: Nicholas Ward has no BIDU position; however, he is long several of Cathie Wood’s Ark Invest ETFs, including ARKK, ARKW, ARKG, ARKX, ARKQ, and ARKF. . Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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