BIDU-My Idea(Bullish)

Baidu is focusing on reducing losses in its Apollo Go business. The fully driverless fleet in Wuhan has grown threefold YoY, with 70% of orders being fully driverless as of April, up from 45% in 4Q23. Baidu has initiated driverless robotaxi services in 11 cities across China, accumulating over 6 million rides with an accident rate only 1/14th that of human drivers. The cost of the sixth-generation autonomous vehicle has decreased by 60% compared to the fifth generation, bringing the price down to 200,000 RMB, thus facilitating commercial deployment. National and local policies are being introduced to optimize the business environment for autonomous driving, supporting the replication of the Wuhan Success across the country. In 2024, RoboTaxi plans to achieve full city coverage in Wuhan with 1,000 new vehicles, aiming to break even by the end of the year and become fully profitable by 2025. Many users have complained about the poor condition of Didi(china uber), citing dirty seats, bad air quality, and some drivers' reluctance to turn on the air conditioning, leading to a poor riding experience. Compared to human-driven cars, many users express a preference for autonomous vehicles like ApolloGO robotaxi, believing they can offer better service and cheaper prices.

Baidu's advertising business has delivered a modest performance with a 3% YoY increase in Q1. However, the outlook is muted due to the trial rollout of GenAI content in search results, which is not yet monetized. Management has indicated that around 11% of search queries now include GenAI content, potentially negatively impacting advertising revenues in the near term as GenAI trials expand. Despite these challenges, it is crucial for Baidu to fully integrate GenAI capabilities into its core search business, as the success of this initiative will significantly influence the company's future. But I feel that Baidu has already fallen behind Alibaba, ByteDance, and Kimi in the Chinese GenAI market.

Baidu's cloud business experienced a re-acceleration in growth, achieving a 12% YoY increase in Q1, and this positive momentum is expected to continue into Q2. The growth is primarily driven by the adoption of GenAI and foundational models, which contributed approximately 7% of total AI cloud revenue. Notably, the company's ERNIE model is gaining traction, handling about 200 million daily API calls in April, 3x higher than in Dec 2023.

From a macro perspective, the HK stock market is currently at a historically low valuation level. If the U.S. cut interest rates in Sep, capital is likely to flow first into undervalued markets like HK stocks. Looking at Baidu's valuation, its current PE ratio is about 13, which has only been exceeded 29% of the time in the past 10 years. A company with advertising, AI, robotaxi, long video(iQiyi, which is china Netflix) and cloud services is worth much more than this valuation. The market is severely underestimating Baidu's value.

While Baidu faces near-term challenges in its advertising business due to the rollout of GenAI content, its cloud and robotaxi business shows promising growth. The current undervaluation of Baidu presents a compelling investment opportunity.