Summary

- Baidu reported its Q4 2022 financial results on February 22, 2023.

- The firm is a major internet search, AI and technology company in China.

- BIDU has recently announced the pending launch of its ERNIE Bot AI.

- With the Chinese government's ban of OpenAI's ChatGPT and support for local alternatives such as Baidu's, along with China's economic reopening, the stock could be worth a closer look.

Quick Take

Baidu (BIDU) published its most recent earnings report for Q4 2022, beating both revenue and EPS consensus estimates.

The firm's primary business is Internet search and related online activities in China.

With the ongoing positive effects of China's economic reopening, the firm's AI and related growth efforts, and my discounted cash flow calculation showing potential undervaluation, interested investors may wish to consider BIDU at its current valuation level.

Company Overview

Beijing-based Baidu was founded in 2000 as an advertising-centric Internet search service for China.

Since then, the firm has branched out into other related specialties, including providing users with mapping services, storage, autonomous transportation and streaming video through iQIYI (IQ).

Major competitive vendors that provide similar services include:

• Sogou.com (SOGO)

• Alibaba (BABA)

• Tencent (OTCPK:TCEHY)

• NetEase (NTES)

• Bytedance - TikTok

• Others

Recent Performance

Topline revenue by quarter has risen per the following chart:

Gross profit by quarter largely remained flat in recent quarters:

Operating income by quarter rebounded in recent reporting periods, as shown below:

Earnings per share (Diluted) were positive in the most recent quarter:

Source for chart data: Seeking Alpha

In the past 12 months, BIDU's stock price has fallen 19.2 percent vs. the Nasdaq 100 Index's drop of 14.6%, as the chart below indicates:

(Source - Seeking Alpha)

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Amount
Enterprise Value / Sales	0.7
Enterprise Value / EBITDA	8.9
Revenue Growth Rate	1.7%
Net Income Margin	3.5%
GAAP EBITDA %	8.1%
Market Capitalization	$49,805,853,860
Enterprise Value	$88,431,575,000
Operating Cash Flow	$23,031,000,000
Earnings Per Share (Fully Diluted)	$10.72

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm's projected growth and earnings:

(Source - GuruFocus)

Assuming the above generous DCF parameters, the firm's shares would be valued at approximately $149.50 versus the current price of $131.59, indicating they are potentially currently undervalued, with the given earnings, growth and discount rate assumptions of the DCF.

Commentary

In its last earnings call, covering Q4 2022's results, management highlighted the somewhat negative impact of the initial removal of the Zero-COVID policies 'as restrictions in China were relaxed and many people got infected.

After the quarter, the firm saw a recovery in its online marketing revenue from verticals such as travel, healthcare, business services and lifestyle searches.

Leadership expects this recovery trend to continue as Chinese consumers re-engage after a period of growing pent-up demand.

Also, the company announced its ERNIE bot conversational AI technology, due to launch formally in March, and has plans to integrate it across all the firm's major business segments.

As reported by Reuters, the Chinese government has noted the potential of AI technologies across many industries and throughout the Chinese economy.

Baidu aims to be a front-runner in developing and applying these new large language model systems.

As to its financial results, total revenue for 2022 was basically flat year-over-year, while its cost of revenue dropped by 1% driven by a decrease in content costs.

Non-GAAP operating income was RMB 23.2 billion for 2022 and operating margin was 19% for the year.

The firm finished the year with $25.23 billion in cash, equivalents and short-term investments and $11.37 billion in total debt.

For 2022, BIDU generated $3.8 billion in cash from operations, CapEx of $1.2 billion for free cash flow of approximately $2.6 billion.

While management did not provide formal forward guidance, it expects its mobile ecosystem to 'continue to generate strong margins and cash flow.'

The company is prioritizing the integration of its conversational AI technology into various areas of its business in light of the Chinese government's ban of OpenAI's ChatGPT and support of local alternatives, which could provide the firm an advantage in the market.

With the ongoing positive effects of China's economic reopening, the firm's AI and related growth efforts, and my discounted cash flow calculation showing potential undervaluation, interested investors may wish to consider BIDU at its current valuation level.

(This story is written by Donovan Jones and first published on https://seekingalpha.com/instablog/12102811-donovan-jones/5844815-baidu-sees-2023-growth-amid-conversational-ai-focus)

Disclosure: The writer has no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.

Additional disclosure: This report is for educational purposes and is not financial, legal, or investment advice. The information referenced or contained herein may change, be in error, become outdated and irrelevant, or be removed at any time without notice. The author is not an investment advisor. You should perform your own research on your particular financial situation before making any decisions.

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