NASDAQ: BIDU Baidu, Inc. Recommendation: SELL - Angela Wang and Lily Luo
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Baidu, Inc.
NASDAQ: BIDU
Recommendation: SELL
Angela Wang and Lily Luo
1
Investment Thesis
Recommendation:
Baidu, Inc. (NASDAQ: BIDU) has substantial long-term downsides in the market, therefore we
recommend a sell.
Rationale:
Baidu is unlikely to return to strong organic growth due to headwinds in the company's digital
advertising business, a failure to effectively create content in its new in-app services, and
inefficient investment in AI.
1 Advertising business slowdown
2 Uncompetitive and low-quality content on Baidu platforms
3 Inefficient investment in AI
Price Target: $103.46
11.9% downside to current price of $117.44
2
Company Overview
Company Profile Historical Stock Chart
Volume
§ Baidu, Inc. is a Chinese internet search company that engages
$310.00 60,000,000
in the provision of internet search solutions and online $290.00
marketing solutions $270.00 50,000,000
§ Baidu offers an array of products such as Baidu Feed, Quanmin $250.00
$230.00
Karaoke App, Baidu Knows, and Baidu Encyclopedia $210.00
40,000,000
• It generates the majority of its revenue from online $190.00
30,000,000
marketing and advertising services $170.00
$150.00
§ Besides the Baidu Core segment, it also operates through $130.00 20,000,000
Baidu maintains 56.6% ownership of iQiyi shares (March 2019) $110.00 $117.44
$90.00 10,000,000
• iQiyi, Baidu’s video-streaming subsidiary, which is an
$70.00
online membership video platform $50.00 0
§ The Company also invests in technology including artificial
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intelligence and autonomous driving
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2019 Revenue by Segment Revenue Breakdown ($ in millions)
$18,000 40%
Other $16,000
13 .65% 35%
CAGR:
Online Marketing
27%
Services: $14,000 30%
$2,724 $3,971
advertisements on $12,000
$1,462 25%
Baidu search and iQiyi
$10,000 $343 $848
20%
Online Marketing $8,000 $81
Services Other: revenue 15%
$6,000 $11,969 $11,474
73% generated from Baidu $10,688
$9,357 $9,428 10%
$4,000
Core and iQiyi $7,086
$2,000 5%
$- 0%
2014 2015 2016 2017 2018 2019
Online Marketing Services Other EBITDA Margin
3
Industry Overview
Overview Search Engine Market Share
§ Baidu remains the leading search engine in China
4% 3%
§ Google exited China in 2010, and unlikely to come back to Baidu
China due to censorship and security rules 7%
Shenma
§ Newly emerged search engines penetrate market quickly
Haoso
• Shenma: only available on mobile 15%
• Toutiao: launched by ByteDance, leverage content from Sogou
71%
popular TikTok video app Others
§ Shopping searches: support online shopping and e-commerce
by searching for product information
§ News searches: trending information and breaking news
Revenue Outlook of Search Engines in China Key Drivers
$ billion
• 98% of Chinese internet users are mobile users
35.
29.1 Mobile users • Mobile devices is the main source of raw
30. %
R: 14.2 25.3 searches
25. CAG 22
18.8 • Marketing is the main revenue source of search
20.
16.1 Advertising engines
15. 11.5 12.4 • Slowdown advertising business due to the trade
10. war
5. • Quality control: select high quality content
Artificial
0. Intelligence • Improve user relationship management
2015 2016 2017 2018 2019* 2020* 2021*
4
1 Advertising business slowdown
Declining Search Engine Advertising Market Increase of Advertisement Inventory
Market Shares of Online Advertisements by Format in China (%) § Alibaba e-commerce advertising
13.5 12.2 11.3 • Ideal platform for businesses to advertise and sell
20.2 14.5
9.5 products through Taobao and T-Mall
12.6 11.4 10.4 Other
13.7 § Tencent’s Ad Network
18.4 23.9 30
Brand Display ads • Wechat, QQ, Tencent News, and Tencent Video provide
12.5 35.1
1bn user base
News Feed ads
• Tencent Alliance Ecosystem: 75% of top apps (100,000)
28.2 31.8 with 500mm users, give budget string as low as $150
31.7 30.3 E-Commerce Ads
29.2
§ iQiyi: advertising business slowdown
Search ads
25.4 22.7 • Removed false advertisements due to government
19.5 17.1 14.9 regulations
2016 2017 2018 2019 2020 • Lower than expected demand for tech-advanced in-feed
advertising platform
2 Uncompetitive and low-quality content on Baidu platforms
Unfavorable Content Shrinking Dominant Power
§ Baijiahao: platform for independent writers, bloggers, and
journalists to write articles and opinion Popular Baidu
§ No selections and no constraints Apps
Before 2012 Baidu Baidu Baidu Baidu
§ False information and low-quality contents
Map Music Knows Post Bar
§ Baidu search promotes Baijiahao excessively
§ Mini-programs: apps within Baidu app
Public Favored
§ Wechat launched mini-programs earlier in 2017 Replacements
§ Wechat has over 1 billion monthly active users in 2019 In 2019
Google Map QQ Music
§ Baidu has 315 million monthly active users in 2019 Zhihu
Alibaba Tencent
5
3 Inefficient investment in AI
AI Long-term Investment AI Implementation in Baidu’s Core Business
§ Baidu’s AI investment is still at an early stage
§ Multi-mode interaction
§ Huge amount of expense goes into the research and
development of autonomous driving, which is not a part of the Baidu DuerOS § Pilot driving monitoring
core business at all smart devices § Onboard Cyber Security
§ Integration of AI into search engine improves user relationship § Vehicle Intelligent Program
management
§ The return of the investment can only be seen in the long run
§ Optimize visual speech processing
§ Help customers increase productivity
Baidu Cloud § Improve operational efficiency
§ AI-powered video editing solution
§ AI call center enterprise solution
AI Investment in Apollo
§ In September, Baidu launched Apollo powered robotaxi pilot
program, which leverages Baidu’s V2X solution that improves
sensors and traffic efficiency
§ Unlike Google and its autonomous driving subsidiary Waymo,
Baidu did not take part in designing the hardware and collecting
the data during the experimental stage, causing safety problems
during the test
§ Disclaimer of Apollo: the platform of Apollo and Baidu are not
responsible for any false information, sensor problems, and
safety issues
§ Other big motor companies will soon become Baidu’s
competitors, and autonomous driving currently does not apply to
people’s need
1Difference in revenue is due to rounding.
6
Possible Upside
Ecosystem of Third-party Content and Service Future Entertainment Spending
$ billion
350
Feed
Content 300
Network 250
All-in-one 200
App: search, 150
watch, read
100
Smart 50
Mini 0
Program 2015 2016 2017 2018 2019 2020
Games Mov ies Anime Music Books
iQiyi’s Investment in Original Contents Healthcare Initiatives
Number of Paid Subscribers of iQiyi (million) § Artificial Intelligence in healthcare sector
120 § Donate AI fundus screening integrated machines,
106
covering 56 million people at risk of eye disease
100
80.7 § Takes 10 seconds to create a screening report for the
80 user
§ Reshape healthcare industry with AI
60 50.8
40 30.2
§ Baidu Doctor in 2015: online medical service provider
§ Allows users to contact local doctors, make
20 10.7 appointments, and ask questions
0 § Conversational bot named Melody that can perform
2015 2016 2017 2018 2019 basic triage on patients in late 2016
1Difference in revenue is due to rounding.
7
Investment Analysis
Why We Bought Baidu? What Has Changed?
Dominate search engine in China with strong Losing its dominant position due to intense
barriers to entry domestic competition and declining search
engine advertising business
iQiyi revenue growth offset by losses due to
declining advertising business and high
Growth in video streaming on iQiyi platform
investment in original content and premium
content
Strong core business enhanced by investment Apollo has safety and function issues and does
in AI not meet the need of the current market
Opportunity for initiating portfolio exposure to Tencent and Alibaba are better investment
Chinese economy choices
8
Key Risks
Key Risks Mitigants
û Premium content and original content would ü The numbers of subscriber only increased by
attract more subscribers in the long run 3.8% from 96.9 million to 100.5 million from Q1
to Q2 in 2019
û The implementation of AI improves users’
experience and Baidu’s user relationship ü Intense competition in the industry and the lack
management of marketing make it difficult to build loyal
customer base
û Creating an ecosystem of third-party content and
services through Baijiahao and smart mini ü Low-quality content makes people choose to use
programs other alternatives for high-quality information
û The number of daily active users of Baidu app ü Gradual process of user growth turning into
and smart mini programs is increasing revenue growth
û China’s first search engine company adopts in- ü Requires large investments in marketing for app
app service model installation and user education
û Healthcare medical initiatives pave the way for ü Baidu was historically criticized for displaying
its deployment in the AI healthcare sector and false medical advertisements and eliminated its
increase brand awareness medical sector in 2017
9
Final Recommendation
Base Case Upside Case
Price Target: $103.46 Price Target: $159.6
Downside: 11.9% Upside: 35.9%
Recommendation:
Baidu, Inc. (NASDAQ: BIDU) has substantial long-term downsides in the market,
therefore we recommend a sell.
10Appendix
11Valuation – Comparable Companies Analysis
12Valuation – WACC
WACC Calculation
Capital Structure
Debt-to-Total Capitalization 20.7%
Equity-to-Total Capitalization 79.3%
Cost of Debt
Cost of Debt 3.6%
Tax Rate 20.0%
After-tax Cost of Debt 2.88%
Cost of Equity
(1)
Risk-free Rate 3.0%
(2)
Market Risk Premium 6.7%
Levered Beta 1.3
Cost of Equity 11.45%
WACC 9.68%
13Valuation – DCF (Base)
14Valuation – DCF (Base)
15Valuation – DCF (Upside)
16Valuation – DCF (Upside)
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