Baidu: Lower Fair Value by 5% on Continued Macro Weakness for the Rest of 2024; Cloud Remains Strong
We lower our fair value estimate by 5% to USD 165 per ADR (HKD 162 per share) from USD 174 (HKD 171) as we expect macroeconomic weakness in China to persist for the rest of 2024 and likely into 2025. Our valuation downgrade is based on forecast revisions to Baidu’s advertising business (72% of Baidu revenue), and we now 1) assume revenue falls 3%-4% year on year for the second and third quarter of 2024 and 2) lower its outlook to low-single-digit growth in 2025 from midsingle digits. Previously, Baidu said its advertising business could see recovery in the low single digits starting in the second quarter of 2024, but we believe that recovery is no longer imminent and visibility is limited this year as macro concerns continue to mount. Advertising headwinds come from the automobile, real estate, and franchising industries, said Baidu. Management did indicate, however, that e-commerce advertising showed relatively modest performance based on 618 sales. Baidu's advertising revenue growth has historically been at least on par with China’s GDP growth rate, but we now expect it to underperform the benchmark for 2024. As such, we elect to reduce Baidu’s forecast revenue growth to be lower than China’s expected GDP growth of 4%-5%, given the lingering macroeconomic concerns. Despite the greater uncertainty, we believe Baidu’s investment thesis remains intact, based on our view on long-term margin expansion and artificial intelligence core strength, and its shares appear undervalued currently.