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Bull of the Day: Baidu (BIDU)

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After peaking above $270 in 2018, Baidu ((BIDU - Free Report) ) shares have been stuck in bull market purgatory, spending most of the last 18 months under $140.

That punishment could be ending soon as the company reinvents itself and recovers from government restrictions on its advertising revenues.

Here's what I wrote on June 13 when I profiled BIDU as the Bear of the Day...

Baidu, the $40 billion web search and marketing portal that used to be considered "the Google of China," especially as they forayed into AI technologies and self-driving cars, rallied over 16% since their strong Q1 earnings report on May 18. But guidance was cloudy enough to cause analysts to lower estimates and drive the stock into the cellar of the Zacks Rank.

BIDU shares didn't remain in the cellar of the Zacks Rank for long though as analysts re-worked their models based on company guidance and the conference call. And it gave me the green light to begin a new position. Here's what I wrote in the Buy Alert for my TAZR Trader members on July 6...

It was my plan this weekend to buy BIDU this morning, but little did I know Alibaba ((BABA - Free Report) ) would wake up like a beast too. Both have gapped higher and should run as BABA will enter a new phase of its bull market and BIDU is the AI-focused player in Chinese big data. Start with a 5% position this week and we'll add on any gap fills back toward $125.

Flash forward to this month's Q3 report, and the now $47 billion BIDU has ascended to a Zacks #1 Rank Strong Buy as analysts raise estimates and view the business transitions as gaining traction.

After a strong earnings beat and raised guidance, the Zacks EPS Consensus for this year jumped 10% to $8.25 in the past two weeks.

Immediately following the company presentation and conference call, Mizuho analyst James Lee raised his firm's price target on Baidu to $185 from $170, noting that the company's core revenue reached positive growth one quarter earlier than expected and was guided up 5% year-over-year for Q4.

Baidu also launched an expansion into "livestreaming," the new platform rage among Chinese youth for shopping and following influencers, by acquiring JOYY ((YY - Free Report) ) Live's Chinese business for $3.6 billion. Lee likes this move because it diversifies the revenue stream strongly into ecommerce and subscriptions and maintained Baidu as his top pick in China.

Lee also anticipates the AD (Autonomous Driving) segment's asset value could be unlocked through a strategic investment with leading OEMs, which could provide a 20% upside to the stock price.

I have always believed that AI and AD represented the primary growth drivers for Baidu, not internet search and advertising, as many Alphabet ((GOOGL - Free Report) ) investors must also believe about their beloved.

But for Baidu, I think these growth levers are stronger here because of the strong Chinese government support for advanced technologies. In early 2018, I described the development of the first urban "AI park" outside of Beijing where Baidu would be the primary R&D company to build and test AD technologies.

Since then, an "AI park" sprung up around Shanghai in 2019. And while NVIDIA ((NVDA - Free Report) ) gets all the attention as the premier builder of AI hardware and software stacks, Baidu's pedigree in AI is beginning to bear fruit.

More coming up on Baidu's evolution into an AI powerhouse in China, right after we take care of some recent negative news.

Muddy Waters shorts JOYY, calls company "almost entirely fraudulent"

Unfortunately, 2 days after Baidu's strong report, I had to share this update with my TAZR members...

Carson Block's Muddy Waters Research said via Twitter, "MW is short $YY bc we conclude it is a near-total fraud. We conclude its businesses, users, and cash are a fraction of what it reports. We estimate that ~90% of YY Live revenue is fraudulent, and ~80% of Bigo rev is fraudulent...When $BIDU diligences $YY Live, the massive scale of fraud will be apparent. Is BIDU so desperate to show growth that it will pay ~7% of its market cap for an almost entirely fraudulent business? Is China Inc that rotten?. Bigo's rot stems from inception & the lie about who founded it. This lie enabled Chmnn Li to defraud at least $156.1 million of real money from $YY shareholders & YY to fraudulently report substantial remeasurement gains."

YY shares dropped over 25% late on Nov 18, from new highs above $105 all the way down to the low $70s. But they have since recovered to $90 as more is learned about the two businesses. And BIDU, who had just made new 18-month highs above $150, fell back to $140.

The short report claims that YY meaningfully misled investor regarding its financials by misrepresenting how revenues flow between itself and talent agencies. Essentially, YY controls talent agencies that manage influencers on the livestreaming platform and paid more than 50% of the total volume of virtual gifts. To support that claim, the Muddy Waters report points to PRC’s Credit Bureau, indicating that the five largest MCNs (talent agencies) on YY contributed only 15% of YY Live’s reported revenues.

Here was reaction from Mizuho's Lee...

We do not cover YY, but based on our understanding of the Livestreaming industry, a platform typically has an internal talent agency that acquires, trains and manages influencers, so the claim by the report is not unusual, but materiality of revenues is the issue that YY needs to address, in our view.

In light of this report, we have confidence in Baidu management to conduct additional due diligence on issues raised by the report. At the same time, we believe that the acquisition could be delayed if YY hires an independent advisor to conduct its own reviews, very similar to what IQ did when facing an allegation of accounting improprieties a few months ago. Furthermore, a potential SEC inquiry could also slow the process.

If Baidu cannot move forward with the acquisition due to MAC (material adverse change), we believe that the company could either build a livestreaming platform internally, or seek other acquisition candidates.

Lee maintained Baidu as their top China Internet pick with a $185 price target, based on a SOTP (sum of the parts) valuation, noting that the stock trades at only 4X FY22 Baidu core EBITDA, against their estimated CAGR of 16%. He said the buy thesis has not changed as all previously outlined catalysts are still in play.

Baidu's Industrial AI Frontier in China

I've always admired Baidu for its committed role in AI, especially as I learned more about the vision and ethics of former chief scientist Andrew Yan-Tak Ng. As a technologist and investor, Ng co-founded and led Google Brain and was a former Vice President and Chief Scientist at Baidu, building the company's Artificial Intelligence Group into a team of several thousand people.

Ng is now an adjunct professor at Stanford University (formerly associate professor and Director of its AI Lab). Also a pioneer in online education, Ng co-founded Coursera and where he has successfully spearheaded many efforts to "democratize deep learning," teaching over 2.5 million students through his online courses.

In July when I bought shares, I highlighted news for TAZR members on Baidu's "new infrastructure" plan for the smart economy (courtesy of company PR excerpts)...

Baidu Unveils Plan to Increase Investments in New Infrastructure to Power the Rise of Industrial AI

Plans to Deploy 5 Million AI Cloud Servers by 2030 and Train 5 Million AI Professionals

Baidu announced that it will increase its investments in cloud computing, AI education, AI platforms, chipsets, and data centers in the coming ten years as part of its efforts to construct "new infrastructure" for the smart economy of the future.

"New infrastructure -- which encompasses emerging technologies like AI, cloud computing, 5G, IoT, and blockchain -- will be the driver for China's economic development in the coming decades," said Baidu Chief Technology Officer Haifeng Wang.

Under the plan, Baidu aims to have 5 million intelligent cloud servers by 2030 and train 5 million AI professionals within 5 years, which will help facilitate the widespread application of AI in transportation, city management, finance, energy, health care, and manufacturing to eventually achieve industrial intelligence.

Deploying 5 million intelligent cloud servers by 2030 is an ambitious target that would create a combined computing capability equal to seven times the total calculable computing power of the world's existing top 500 supercomputers.

Viewing human capital as a core component of the new infrastructure, the Baidu goal to train 5 million AI professionals in the next five years keeps humans at the center of this massive AI R&D. Baidu has been working with more than 200 leading universities in China to develop courses related to AI and deep learning and has already trained more than 1 million AI experts.

It sounds like China might be better paced than the US to migrate college students into jobs of the future.

Baidu has more than 7,000 published AI patent applications in China, the highest in the country. The AI open platform Baidu Brain has made available more than 250 core AI capabilities to over 1.9 million developers, while PaddlePaddle, the largest open-source deep learning platform in China, services 84,000 enterprises.

Baidu's Kunlun and Honghu AI chips are among the highest performing AI chips and are built for a wide range of scenarios. Baidu Cloud is China's leader in public cloud and AI cloud services with more than ten data centers across the country.

This new infrastructure is already allowing Baidu to lead the intelligent transformation of different industries. Baidu's smart finance products serve nearly 200 financial institutions, while Baidu's intelligent healthcare products are deployed at more than 300 hospitals and 1500 grassroots medical institutions.

Baidu Brain for Cities is already in place in Chongqing, Suzhou, and other cities, supporting more intelligent city management. Baidu's new investments will enhance its ability to rollout AI applications in these scenarios, as well as in manufacturing, energy, and transportation.

Bottom line on Baidu: The transformation into an AI powerhouse is real and streaming/social deals won't determine the fortunes of BIDU. I would remain a buyer of pullbacks to $130.

Disclosure: I own shares of BIDU, BABA, and NVDA for the Zacks TAZR Trader portfolio.

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