Why Baidu Is the Technology Stock to Buy

2015 had been an unpleasant year for the China’s internet giant, Baidu (BIDU) with its shares’ value plummeting approximately 17% in the stock market. In reality, this downward momentum in its share price performance continued in 2016 as well, as its shares lost a further 26% of their market value in the first five weeks. However, the stock has gained impressive momentum on the market since then and appreciated more than 32%, mainly on the back of strong fourth-quarter results.

At present, its shares are still below around 2% since year-to-date.
In my opinion, this drop in its share price performance creates and opportunity that the investors shouldn’t ignore due to the fact that the company is diversifying its business that should deliver higher returns in the long-run. Let’s see why.

Diversifying sources of revenue

Baidu, in an effort of increasing the sources of revenue, plans to enter into the self-driving car segment in the United States. According to the Wall Street Journal, Baidu will soon start testing autonomous cars in the U.S., as part of its attempt to introduce a commercially viable model by 2018.  At present, Baidu is engaged advocating for the better coordination with the U.S. government, which the company believes is the necessary to get self-driving cars on the road. In fact, the company has asked the government to make small changes in the infrastructure to put up robot cars in the region.

Apart from the U.S., Baidu is well set to launch the self-driving cars in the home country by 2018. Its autonomous driving project at the Beijing Deep Learning Lab achieved key milestones during 2015, as Baidu completed fully autonomous tests under a range of complex environmental conditions. At the same time, Baidu has invested in the AI technologies such as high definition mapping, environment perception, sensor fusion and motion planning & control so as to develop and support the autonomous driving in the region.

Thus, moves such as these will allow the company to grow its revenue extensively in the long-run, given the robust growth for autonomous vehicle market. According to the Boston Consulting Group, the overall driverless car market is expected to hit approximately $42 billion, with annual autopilot car sales of 12% to 13% by 2025. Meanwhile, the report expects the sales of autonomous vehicle features such as highway autopilot and autonomous valet parking to provide a market opportunity of $38 billion by 2035.

This presents a favorable tailwind for Baidu going forward. In fact, Baidu, in order to vigorously tap this underlying growth in the autonomous vehicle market, has recently entered into commitments with several automakers in China to deploy their first autonomous cars in the region. At the moment, the company is using modified BMW 3-series sedans for its tests.

Continues to improve its core search and transaction services businesses

Baidu continues to see increasing market traction for its recent offerings such as Baidu Nuomi, Takeout Delivery and Baidu Wallet. For instance, gross merchandise value for Baidu Nuomi grew more than fourfold in 2015 as compared to 2014, while gross merchandise value for Takeout Delivery showed an upward trajectory of nearly eight times from the first-quarter to the fourth-quarter of 2015.

As a result of growing GMVs for Baidu Nuomi and Takeout Deliver, the company saw more traction for its Baidu Wallet that had 53 million activated accounts during the fourth-quarter, up from 45 million sequentially and an increase of 189% year-over-year.

More importantly, Baidu has recently expanded its reach into a number of other popular verticals such as pharmacies, convenience store, grocery stores, florists and cake shop with upgraded features for these core products such as Baidu Nuomi and Takeout Delivery.

In addition, the company is escalating Baidu Nuomi as a platform to the most third-party partners in the industry. This platform should complement the core vertical top restaurants and move tickets with partners in industries like travel, event ticketing, and laundry, housekeeping and auto services. This reach into different vertical should increase their GMVs thereby increasing transactions for the Baidu Wallet in 2016.

For example, driven by expanding verticals, the company experienced more transactions falling to the Baidu Wallet for February that recorded more than 50% of Baidu Naomi’s transactions. So, these efforts of expanding verticals for its core products should drive its financial performance going forward. In fact, due to this very reason, the company expects its revenue to grow to the tune of 21.1% to 25.5% for the first-quarter year-on-year basis.

Conclusion

Thus, the internet giant looks attractive going forward for two reasons. First, it is diversifying its revenue sources such as investment in the autonomous cars that should deliver growth in the long-run, and second the expansion of its core products such as Baidu Nuomi, Takeout Delivery into new verticals that should keep its top line performance intact in the short run.
Published on Apr 15, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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