How Baidu Inc (ADR) Stock Is Catching up to Its Chinese Counterparts

How Baidu Inc (ADR) Stock Is Catching up to Its Chinese Counterparts

Baidu Inc (ADR) (NASDAQ: BIDU ) has been left behind as its fellow ‘BAT’ companies surge ahead. Not to be left out of the acronym game, Chinese internet stocks have their own moniker, referring to BIDU stock, Alibaba Group Holding Ltd (NYSE: BABA ) and Tencent Holdings Ltd (OTCMKTS: TCEHY ).

In terms of returns, BABA has led the ‘BAT’ trifecta up 104% year-to-date. Tencent is up 77%, while Baidu has lagged at 44%.

However, BIDU stock could catch up by the end of the year. If you look at share price performance since the beginning of July, the stock has meaningfully outperformed BABA and TCEHY – 32% gain versus 24% and 19%, respectively.

It stands to reason that that upward momentum could continue especially as Baidu’s search and video businesses drive growth.

Baidu’s Edge

Advertising is an important revenue driver for all three ‘BAT’ companies. Alibaba advertises through its digital marketplaces, while Tencent advertises through its Wechat platform and gaming. But if there are any lessons to be learned from Alphabet Inc (NASDAQ: GOOG , NASDAQ: GOOGL ), it’s just how superb the search business can be for attracting advertising dollars.

For what is normally a very competitive business to be in, Baidu benefits immensely from the protectionist policies that prevent Alphabet from dominating the domestic Chinese online search market. I would argue that Alphabet would otherwise be its biggest threat even in comparison to other local competitors. Alibaba is certainly a concern though, especially for retailers looking to advertise. There’s definitely first mover advantage that goes to BABA on this front. This just means BIDU needs to hone in on other sectors.

The numbers look pretty good in spite of some fumbles like the death of a student who researched experimental cancer therapies listed on BIDU’s search engine. The company posted 14.3% revenue growth for the second quarter and guiding for a third quarter year-over-year increase of 26.7% to 30.1%. While online marketing revenues looked a little light, Baidu is improving monetization, which compensated in part for the decrease in customers. Revenue per online marketing customer increased 32%.

The long-term trend of increased online activity is a global one. Alphabet has been able to reap the benefits in the form of double-digit revenue growth for many years riding this wave, and BIDU can as well. With 70% market share, Baidu remains the dominant search engine for Chinese users, meaning huge opportunities to further drive traffic and enhance advertising topline.

Then there’s the video streaming business, iQiyi, which is the leader in China. Tencent (Tencent Video) and Alibaba (Youku) are predictably in the mix as well, but with deals like the one struck with Netflix, Inc. (NASDAQ: NFLX ) earlier this year , BIDU’s platform could pull ahead with additional users and better returns.

Bottom Line on BIDU Stock

Shares trade more cheaply than BABA, so you’re getting strong core businesses growing rapidly at a decent price (for Chinese tech). Plus, there’s the option value in AI initiatives , an area that Baidu has been aggressive in pursuing.

The option value is there, but quantifying it is no easy task given the early stage nature. What’s clear though is that the Chinese government is very pro-AI, and that management believes this will be a long-term driver for BIDU stock’s value.