What Is The Future For Baidu Inc?

Baidu Inc (Nasdaq: BIDU) runs the largest search engine in China. Its namesake search engine holds a 70% market share in the world’s largest internet market with about 900 million users. 

Baidu was listed on the United States Nasdaq stock exchange in 2005 at an offering price of US$27. It had since risen to the current US$106.

In this article, we delve into its businesses, latest earnings, historical financials, and competitive strengths.

Business Overview 

Baidu’s business covers three key main areas: search ecosystem, Artificial Intelligence (AI), and online entertainment services.

The search ecosystem connects users to information online through websites, apps, and mini-programs are accessible through mobile devices, computers, and other smart devices. Its flagship Baidu App offers search-plus-feed functions that leverage deep user insights from a vast database to provide accurate search results. As of end-2019, Baidu App has daily active users of 195 million.

The AI segment utilises Baidu’s in-house technology to offer various AI-driven smart solutions. Key initiatives include DuerOS, a leading voice assistant installed in its Xiaodu smart speakers, and Baidu Cloud that provides cloud infrastructure and software to enterprises. Baidu also runs the Apollo autonomous driving platform, one of the global leaders in the driverless cars sector. 

iQIYI is one of China’s largest online entertainment service providers. It produces and distributes a wide range of original and licensed content such as internet movies, dramas, video clips, influencer videos, and video blogs. 

With a wide reach and vast user base, Baidu derives revenue mainly from online marketing, mobile advertising, and membership subscription services. 

Latest Financials 

Baidu derives about two-thirds of its revenue from online marketing services. Hence, during the first quarter of 2020 when there was sharply lower advertising demand from industries affected by the Covid-19 outbreak, Baidu’s revenue declined 7% to RMB22.5 billion. 

The group suffered a quarterly operating loss of RMB437 million, which narrowed considerably from RMB936 million in 2019.

However, Baidu’s products benefited from the masses that stayed at home. Baidu App daily active users surged 28% in March and iQIYI subscribers grew 23%. 

Cash flow from operating activities was RMB2.2 billion, 32% higher than the same period in 2019. 

Historical Earnings

Baidu’s revenue increased steadily over the past five years, with a compounded annual growth of 12.8%. However, operating profit that fluctuated between 14% to 19% suggests that cost management is an issue. 

This was most apparent in 2019 when operating profit dropped more than half year-on-year. This was due to a large increase in hardware, cloud costs of goods sold, and research and development expenses as the group stepped up investment in AI and cloud computing. 

The group’s businesses are highly cash-generative, as they churned out increasing operating cash flow except for 2019. Nevertheless, the figure for 2019 was relatively high over the five-year period.

Source: Self-compiled from annual report 

Online Marketing Services

Even with a commanding 70% lead in China’s domestic search engine market, Baidu faces considerable pressure on different fronts. Other social and lifestyle services apps with a vast user base and comprehensive mobile platforms ecosystems are competing for advertisers’ dollars. Examples include WeChat and Meituan Dianping. 

New competitors are entering the sector too, including ByteDance that has launched a new search function in its popular TikTok app.  

iQIYI

iQIYI, often dubbed the Netflix of China, boasts 120 million subscribers as of Sept-2019. It was acquired by Baidu in 2012 and has since grown to become an important piece of Baidu’s business as its share of total revenue increased from 20% to close to 30% in 2019. 

While iQIYI has been growing its subscriber and active users base, it has been loss-making as it recorded an operating loss of RMB9.2 billion in 2019. This is due to slower demand for advertising services, and increased investment in original content production to maintain subscriber growth. 

Strengths and Opportunities

Artificial intelligence and related fields is one of technology’s future key growth sectors. An advanced AI technology became the Chinese government’s national agenda in 2017. Already the world’s second-largest investor in the field of AI, China seeks to become the global AI leader by 2030. 

While companies working on AI are a dime a dozen in China’s dynamic technology sector, Baidu has one of the most advanced technologies and the widest application. Its Apollo open-source self-driving platform is at the forefront of the industry with some of its robo taxis already plying public roads in Changsha, China. It also leads the sector in some industry measures such as annual distance of successful testing. 

As a testament to Baidu’s strength in AI, the Chinese government has selected Baidu as a national champion in artificial intelligence focusing on autonomous driving.  

The Negatives

Baidu does not have a diversified business in comparison to its internet peers. It is heavily dependent on its search portal and related online marketing services for revenue and lacks complementary products that keep users engaged on its platforms. Google’s suite of personal and work efficiency applications entrench users in its ecosystem, hence enabling it to hold its own against competitions. Baidu does not seem to have much success besides its search engine. 

While Baidu’s AI and self-driving initiatives hold great potential, they are still bleeding cash. These technologies have not matured for commercial applications and require continuous research and development. It remains to be seen when they can contribute to the bottom line. 

Conclusion

Baidu’s search engine is still the undisputed leader in China’s online market. However, its position is under threat as internet users’ search behaviour has shifted to being embedded in other online activities such as chatting, gaming, and reading news feed. The lack of a sticky online ecosystem with multiple apps and programs further highlights Baidu’s weakness in having a single-dimensional service. 

Its fledgeling in AI and autonomous driving businesses are still not earnings positive. iQIYI’s stiff competition causes it to incur large content development and user acquisition costs, resulting in operating losses. 

Baidu Inc is thus more suitable for savvy investors who have a deep understanding and appreciation of AI technology. It helps too if one is patient and is willing to wait for its new businesses to bloom. 

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