Baidu Q3 Earnings Review: Strong Profitability and Rapid Monetization of AI Applications

On November 21st, Baidu released its Q3 earnings report. On November 22nd, JPMorgan released its analysis of the report, stating that Baidu's profitability remained strong and that it was able to rapidly monetize the use of artificial intelligence (AI) in consumer, advertising, and enterprise markets.

Stock rating: Overweight

Closing price on the day of the financial report release: $113.42

JPM target price: $185.00

Recent closing price: $124.00 (as of 11/28/2023)

AnalysisBaidu's Q3 2023 revenue was CNY 34.4 billion, which was 1% higher than JPMe/Bloomberg's consensus estimate, indicating deteriorating demand from advertisers. However, JPM believes that incremental income from Ernie can partially offset the short-term macro weakness and become an additional growth driver. Adjusted earnings per share were CNY 20.4, which was 13%/16% higher than JPMe/Bloomberg's estimates, benefiting from sustained operating leverage and limited impact from AI-related investments. JPM believes that Baidu's rapid monetization of AI based on generative models will begin to take effect in 4Q23 and could become a significant financial contributor in 2024, potentially driving up the stock price.

Group-level non-GAAP operating profit was CNY 7.6 billion, a YoY increase of 5%, which was 10% higher than JPMe, mainly due to sustained operating leverage. Non-GAAP core revenue for Baidu was CNY 6.7 billion, 11% higher than JPMe. The adjusted operating profit margin for Baidu Core this quarter was 25.1%, higher than JPMe's 23%.

According to management, the new generative AI-based revamped ad platform is expected to generate tens of millions of yuan in revenue in 4Q23. Increased user base: Over 10,000 companies are using Ernie through APIs, generating tens of millions of queries every day. Generative AI-based revenue will drive cloud growth: With the rapid growth of generative AI-based revenue and minimal impact from the Intelligent Driving Cloud project, management expects cloud revenue to resume positive growth in 4Q.

3. Apollo Go completed about 821,000 rides in 3Q23, a YoY increase of 73%. As of September 30th, 2023, Apollo Go has provided a cumulative total of 4.1 million rides to the public.

JPM expects recognized profit estimates to be revised upward given the significant improvement in Baidu Core's profitability rate. Additionally, considering management's comments on the short-term revenue potential brought by generative AI, we expect the market to have a positive response to this earnings report.

JPM believes that weak demand in China's e-commerce industry during 3Q23 may lead to reduced estimates prior to the release of the Q3 earnings report, despite continued recovery in offline verticals. However, recent catalysts for Baidu's stock include (1) incremental stimulus policies potentially leading to consumption recovery; and (2) disclosure of adoption and commercialization of products based on generative AI-generated content (AIGC). Finally, JPM reiterates its "buy" rating on Baidu.