The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology  – Senior Analyst at I Know First. 

[Source: eTrans Systems, May 9th, 2018]

Stock Forecast: Baidu Is Still A Good Buy For Long-Term Growth Investors:

Summary:

• It’s been 10 months since my last buy endorsement for BIDU. The stock has since shot up by more than 40%
• I am still reiterating a buy for Baidu. This Google of China has more upside potential.
• It is true that Baidu’s market share in China’s online ads is declining. However, China online advertising industry is still growing a more than 20% CAGR.
• For this year, China’s online ads will generate estimated revenue of 497.1 billion yuan or $77.6 billion. This estimate is expected to grow to $120 billion $by 2020.
• Baidu still touts 77.5% market share in China’s search engine market. Baidu is in great position to benefit so much from China’s search engine ads.

I am reiterating a buy rating for Baidu (BIDU). The stock has shot up by more than 40% since my last bullish rating for it ten months ago. Baidu’s stock has notably outperformed Google’s (GOOG) for the past 12 months. However, Baidu’s 77.5% market share in China’s search engine market compels me to believe that BIDU has more upside potential.

Baidu’s super-dominant search engine will help it benefit the most from China’s fast-growing online ads industry. It is projected that China’s online ads industry will reach revenue of 497.1 billion Yuan (or $77.6 billion) in 2018, and 765.2 billion Yuan ($120 billion) by 2020.

The recent bull rally on BIDU is also courtesy of its strong Q1 2018 earnings report. The Q1 revenue of $3.33 billion is up 31% year-over-year. Thanks to its dominant search engine, Baidu’s online marketing contributed $2.74 billion, up 23% year-over-year. Baidu now touts 475,000 online marketing customers, up 5% year-over-year.

The average revenue from online marketing customers is now $5,800, up 19% year-over-year. More importantly, Baidu’s quarterly revenue is now 78% from mobile. This is higher than its previous 70% contribution last year. Baidu is clearly succeeding as a mobile-first digital advertising company.

Shrinking Market Share In A Growing Online Ads Industry Is Not A Problem

China’s online ads industry is growing at over 20% CAGR. It doesn’t matter much if Baidu’s market share on China online advertising is shrinking. China’s digital advertising industry is getting more competitive. NetEase (NTES), Alibaba (BABA), and Tencent (TCEHY) do not have search engines but they are formidable advertising players because of their large captured audience.

(Source: Statista)

Intensified competition in China’s digital advertising industry is not going to seriously derail Baidu’s FANG-like growth story. As long as Baidu can keep at least 15% share in digital advertising, it can sustain its positive annual revenue growth rate. A consistent year-over-year increase in Baidu’s topline is a good reason why you should add BIDU to your holdings.

(Source: Morningstar)

Baidu Has A Strong Tailwind From iQiyi

Baidu’s future is not limited to its search engine dominance. It can also become a leader in China’s booming entertainment industry. The recent IPO of Baidu’s online entertainment business, iQiyi raised $2.25 billion. Baidu now has more money to augment iQiyi’s content library. This can make it more competitive against Tencent Video and Youku.

Baidu’s iQiyi is considered as the Netflix (NFLX) or YouTube of China. iQiyi is a very popular streaming app where Baidu can deliver more online ads. As per the estimates of Analysis.cn, iQiyi has the most number of active users at 509 million. Tencent Video only has 480 million and Youku 420 million. It is true that iQiyi is a streaming platform that comes with many ads-tolerant users.

On the other hand, the number of paying ad-free customers of iQiyi has increased from 10.7 million in 2017 to 50.8 million last year. At this growth rate, two years from now, iQiyi might have more than 130 million paying subscribers.

Conclusion 

I am long BIDU and its persistent dominance of China’s search engine advertising should inspire you to also add this stock to your long-term growth portfolios. If you want to benefit from China’s rapidly growing digital advertising industry, going long on Baidu is a good way to do it.

BIDU is also cheaper to own than its peers in the Internet Services industry. Its P/E Ratio of 33.7x is notably lower than its peers’ average ratio of 49.9x.

My reiterated buy rating for BIDU is in line with the bullish market trend forecasts for it. I Know First has a high predictability score of 0.63 for Baidu’s one-year market trend forecasts. It means I Know First’s stock picking Artificial Intelligence algorithm has an excellent history of correctly predicting BIDU’s one-year market trend patterns.

TipRanks has an average 12-month price target of $293.40 for Baidu’s stock. My own 12 month PT is $300. I am highly confident that Baidu can achieve this PT once more hedge fund managers start appreciating the long-term potential of Baidu dominant search engine and iQiyi’s half-billion video streaming users.

A Goldman Sachs analyst has a $319 12-month PT for BIDU.

(Source: TipRanks)

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day, and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm. This allows users to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.