I wrote about Baidu (BIDU) as the Bull of the Day in November after the company's Q3 report inspired analysts to raise estimates and upgrade their outlooks as several business transitions were gaining traction.
As of Nov 27, the strong earnings beat and raised guidance caused the Zacks EPS Consensus for 2020 to jump 10% to $8.25. By late December, the profit projection moved up to $9.01 and this month it climbed to $9.75 after the company described their aggressive transitions in web content, advertising, and AI -- and announced their plans to build autonomous cars in China.
More importantly, this year's EPS consensus has risen from $10 to $10.86 as Wall Street analysts finally catch up to the story. More on them coming up, but here's a preview in the article and video I published a couple of weeks ago to explain what -- or rather, who -- helped launch BIDU shares over $200...
How Cathie Put the Wood to Wall Street: TSLA, SQ, ROKU, CRSP, BIDU
But following the Nov 16 report, the stock fell from new 52-week highs above $150 and languished for two weeks, revisiting the $132-133 support zone where I had begun an initial position in July.
Amidst that uncertainty and languishing share price, here's what I concluded in my Nov 27 report...
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.
Then on December 9, the stock went on a 5-day tear, breaking above $150 and surging to $186 on big volume.
From the Google of China, to the Tesla of China?
The big catalyst on Dec 15 that moved shares 14% from $163 to $186 was a story in Reuters about Baidu in talks with several electric vehicle (EV) manufacturers in China to build their own next-gen EVs.
Since Baidu has deep experience with both artificial intelligence (AI) systems and ADAS (advanced driver assistance systems) that supply Volkswagen, Toyota and Ford, the speculation about the company making a deeper push into the auto industry really ignited some investor interest.
Baidu would offer EVs expanded capabilities based on their proprietary AI systems. The Reuter's story on the evening of Dec 14 was based on 3 sources and the company did not confirm any of the speculation, but I found this fact highly interesting...
"Baidu operates autonomous taxi service Go Robotaxi with safety drivers on board in Beijing, Changsha and Cangzhou, and plans to expand to 30 cities in three years. It gained approval last week to test five cars in Beijing without safety drivers."
On January 10, Baidu confirmed all the rumors with a press release titled "Baidu Announces Plan to Establish an Intelligent EV Company and Forms Strategic Partnership with Geely." Basically, Geely will be responsible for manufacturing the vehicles while Baidu will focus on the AI+ADAS software behind the car.
The idea of a standalone electric vehicle company where Baidu will be the majority shareholder finally woke up a few other investors besides me and Cathie Wood.
Here's what I wrote on Jan 12 to my TAZR Trader members, where we were buyers of BIDU last year between $120 and $140...
It's about time!
This is what I've been waiting for -- as long as 3 years!
Finally, this turns BIDU from the Google of China into both the Tesla and NVIDIA of China!
Keep in mind, we are not trying to take cars away from drivers. The first stage, as we learned from Mobileye five years ago, is just to get drivers used to ADAS, or Advanced Driver Assistance Systems, like Automatic Emergency Braking (AEB).
Congrats to you if you believed and bought and hung on when the bears seemed to dominate the stock below $140!
"Winner Take Most"
I borrow this phrase from Cathie Wood of ARK Invest who has made her followers very happy with heavy investment in Tesla (TSLA) shares. If you saw my February video and article Tesla to $7,000: Buy the Launch Abort at $500, you know that she moved her price target from $5,000 to $7,000 (pre-split) in January.
Her thesis was always a long-term view that Tesla would own the "autonomous EV + ride-hailing" space, with their capability to generate 80% gross margins. Her vision for Tesla as an investment is unfolding much faster than even she anticipated, as she expects the real "disruptive innovation" fruits to take another decade to blossom.
I have always believed that AI and AD (autonomous driving) represented the primary growth drivers for Baidu, not internet search and advertising, as many faithful Alphabet (GOOGL) 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) gets all the attention as the premier builder of AI hardware and software stacks, Baidu's pedigree in AI is beginning to bear fruit.
Now even thought Baidu isn't going to take on Tesla in the luxury and mid-tier EV market, their total addressable market opportunity in China could be even greater with autonomous driving for the masses.
The fact that Volkswagen (VWAGY) CEO Herber Diess was the first industry veteran to acknowledge that Tesla should be valued like a technology disruptor, not a car company, is the same logic sending BIDU shares up 100% since my November report.
Borun on EVs
My colleague Dave Borun has spent years studying the economics and technology of EVs, especially the battery and energy storage innovations. He has published several special reports for Zacks Ultimate members on the topic, with the most recent in October totaling 24 pages packed with info and insight -- and it didn't even include the 20+ slide research presentation he does for institutional investors to explain the battery technology.
So when Dave talks about EVs, I'm listening. Here's what he told me when I asked him about all the various players in China...
The opportunity is "hundreds of millions of people who have never owned a car and have no preconceived notion about what a car should look like - or even if they should let it drive for them, share ownership, lend it out when they're not using it, etc. It's like a totally blank slate and I'm positive there will be some big winners as the market matures."
That was all I needed to hear to remain invested in Baidu. Because despite issues of questionable financial reporting and fraud among many Chinese companies, the one thing we can't deny is that somebody is going to win in the world's largest middle class where the government is fully behind building infrastructure to keep the massive population thriving.
I don't invest in very many Chinese companies because of the unknowns and risks. But when I do, I focus on "winner take most" companies like Alibaba and Baidu.
Wall Street Plays Catch Up
On January 13, JPMorgan analyst Alex Yao raised the firm's price target on Baidu to $290 from $155 -- quite a leap! -- and told investors that he views the company's entrance into smart car manufacturing via a joint venture with Geely as "a catalyst to unlocking value in Baidu's broader intelligent driving investment."
Yao assigns a $14 billion valuation to Baidu's intelligent driving platform, Apollo, along with the Geely JV -- representing 17% of the current market cap -- adding that he now expects developments in smart car and autonomous driving to continue to drive Baidu's share price in coming quarters as core advertising enters the cyclical recovery stage.
And on Jan 19, Citi analyst Alicia Yap raised her price target on Baidu to $292 from $183, in light of the stock's "re-rating" to account for potential upside from Baidu's autonomous driving technology and upcoming EV. In her sum-of-the-parts assumptions, Yap believes Baidu shares still have upside, especially if the fundamental advertising recovery trend comes in stronger than expected and if the EV and autonomous driving-related initiatives get closer to monetization potential.
Bottom line on Baidu: We now have a clear potential winner in the Chinese autonomous driving market. I would remain a buyer between $220 and $240.
Disclosure: I own shares of BIDU and NVDA for the Zacks TAZR Trader portfolio.
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