Baidu (BIDU) is presently going through a bearish phase, mainly due to:
i) The trade war,
ii) Macro slowdown in China,
iii) Mounting competition in the Chinese internet sector.
That has led to an increase in short sellers, which resulted in a price slump.
Graph 1 – Percent of shares outstanding short
When companies fall from grace, problems that already existed tend to be amplified by panicking investors. Additionally, when the negative sentiment becomes prevalent, it is very hard to remove the negativity filters from the market.
The trade war and the macro slowdown, in China, are two faces of the same coin. The trade war is making economic agents refraining from big investment decisions, which is slowing the economy. On the other hand, the mounting competition is something to be expected in a sector that has been growing at a fast pace, while being very profitable.
Likely, the trade war and the macro slowdown will be solved, sooner or later. Donald Trump needs a trade deal to show the electorate for the 2020 election. On the same note, the internet sector in China might be going through a cold phase, but it still has a lot of room to grow.
Baidu’s core business comprises the most used search engine in China. The competition is growing in the advertising sector, which, coupled with the macro slowdown, is making the advertising revenue to drop. Still, it is a cash-cow, likely to finance the development of the other projects, in the mid-term.
Baidu has significant positions in two floated companies. It owns 58% of iQIYI (IQ), and 19% of Ctrip (CTRP). The market value of those two positions is worth around 25% of Baidu’s market capitalization, and both companies, still have plenty of room to grow.
Additionally, the company has a couple of moonshots. The Apollo (autonomous driving) and Duer (voice assistant) stand as the most likely to be successful in the near term.
Finally, the company has an artificial intelligence laboratory that is developing multiple applications, from transportation to finance.
On a sum of the parts (SOTP) perspective, the floated businesses represent 25% of Baidu’s market capitalization. Meaning that we are valuing the most used search engine in China, the growing cloud business, the autonomous driving division, the voice assistant division, and the artificial intelligence labs, at just $30 billion. It seems pretty low for one of the most innovative Chineses companies.
(Photo credit: IsaacMao)
Disclosure: I am long BIDU. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.
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