Baidu shares down nearly 30% in 2024. Is it a value play?

Baidu (BIDU 0.61%) released its second quarter earnings report on August 22. The Chinese tech giant’s revenue was almost flat at 33.93 billion yuan ($4.67 billion) and missed analysts’ expectations by $70 million. Its adjusted earnings per American depositary share (ADS) fell 7% to $2.89, but still beat the consensus forecast by $0.29.

Baidu’s share price fell after that mixed report and is down nearly 30% for the year. Some investors might consider it a deep value play at just 9x forward earnings, but I wouldn’t buy it for four simple reasons.

Image source: Getty Images.

1. Baidu’s core business is withering

Baidu owns China’s largest online search engine, other websites and control of the video streaming platform iQiyi (IQ -1.07%). It generated 60% of its revenue from its online marketing services in the first half of 2024. That core business has faced tough macro, competitive and regulatory challenges over the past few years.

Data source: Baidu. Terms RMB. YOY = Year Over Year.

On the macro front, the soft Chinese economy has reduced the market’s appetite for new ads. In terms of competition, many advertisers have moved away from Baidu and bought more ads on higher-growth platforms such as ByteDance’s Douyin (known as TikTok overseas) and Tencenthis (TCEHY 0.33%) Weixin (also known as WeChat). New generative AI tools are gradually disappearing into Baidu’s main search engine, and more companies are also directly buying listings and sponsored ads on Alibabahis (GRANDMA -4.27%) e-commerce platforms and other marketplaces instead of Baidu’s display and search ads.

As Baidu has juggled these challenges, Chinese regulators have cracked down on some of its fastest-growing industries — including video games, streaming video, e-commerce and online education. That crackdown halted ad buys in those sectors.

Baidu tried to counter these headwinds by expanding its “managed business pages” — which allow the company to manage a brand’s entire presence across its entire ecosystem — and this shift has seemingly stabilized its online marketing business in 2023. Unfortunately , this impulse died out. in the first half of 2024. It is now trying to reboot the business with new generative artificial intelligence (AI) search tools, but admits those features could cannibalize traditional search and display ads.

2. Baidu’s cloud and AI growth is slowing

As Baidu’s online marketing sales growth has slowed, it has expanded its cloud and AI division to offset the slowdown. This expansion made the non-online marketing services unit its new growth engine, but it also cooled in 2023 and 2024.

Data source: Baidu. Terms RMB.

This segment, which accounted for 22% of its revenue in the first half of 2024, also faces intense macro and competitive challenges. Headwinds have led many companies to limit their cloud spending over the past two years, and Baidu’s AI cloud platform has struggled to keep up with larger cloud rivals such as Alibaba, Huawei and Tencent. These three market leaders controlled 74% of China’s cloud infrastructure market at the end of 2023, according to Canalys.

Baidu expects the growth of the artificial intelligence market to generate long-term headwinds for its cloud business, but that acceleration likely cannot offset the slowdown in its marketing business. It may also struggle to expand its cloud and AI businesses as the US tightens restrictions on the export of advanced AI chips to Chinese companies.

3. Baidu focuses too much on margins and redemptions

As Baidu’s revenue growth has slowed, it has aggressively cut costs to stabilize its margins. From 2021 to 2023, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased from 20% to 26%. This figure remained constant at 26% in the first quarter of 2024 and increased to 27% in the second quarter.

Baidu has also invested a lot of its money in buybacks. It has already bought back $1.2 billion in shares from its $5 billion buyback plan, which it launched last February.

The bulls could see these strategies as disciplined moves aimed at stabilizing earnings growth, but they also strongly indicate that its business is maturing. These conservative strategies could also hinder Baidu’s ability to keep up with its more nimble competitors in the advertising, cloud and AI markets.

4. It deserves its discount rating

Analysts expect Baidu’s revenue to rise just 1 percent this year as adjusted earnings fall 3 percent. It will also remain out of favor for a long time as the tech war between the US and China drags on and turns many investors away from Chinese stocks. Even if you want to gamble on Chinese stocks, there are better long-term plays than Baidu. Alibaba and Tencent are more diversified and generate more stable growth, but trade at just 10 and 15 times forward earnings, respectively. Baidu’s stock looks cheap, but it deserves its discount valuation, and I wouldn’t touch it until a few green shoots appear.