August 1, 2018 / 6:16 AM / 4 months ago

Breakingviews - Baidu's core strength exercise is underappreciated

Members of staff work at the Baidu booth during Global Mobile Internet Conference (GMIC) at the National Convention in Beijing, China April 27, 2018. REUTERS/Damir Sagolj

HONG KONG (Reuters Breakingviews) - Baidu’s core strengthening exercise has been underappreciated. The Chinese search giant delivered 45 percent earnings growth last quarter, having shed distractions like financial services and food delivery. Founder Robin Li’s big artificial intelligence plans will take time to mature, and economic headwinds are looming. But applying machine learning to fine-tune its mainstay content business should pay off sooner.

    Baidu has struggled to generate enthusiasm in recent years. The group has been wandering into different business lines for years, chasing the venture capital buzz of the moment, without much success. As a result, it was left trailing rivals Tencent and Alibaba and now risks being overtaken from behind by hot startups like AI-powered newsfeed generator Toutiao. Today shares change hands around $250 each, around 26 times forward earnings, against 30 times for Alibaba and nearly 35 for Hong Kong-listed Tencent.

    Li and his team have wisely refocused on what they do best: searches and news delivery. It seems to be working: in the second quarter, the “Baidu Core”, which excludes Netflix-like iQiyi, generated $3 billion in revenue, an annual increase of 28 percent, while the number of users of its app and newsfeed services grew by nearly a fifth. The company expects overall revenue to rise up to 30 percent next quarter and is increasing the amount it spends on research, pleasing investors.

    But the stock hardly reflects Baidu’s improved fortunes. A Jefferies sum-of-the-parts analysis suggests the main business is worth around $66 billion, out of a $100 billion total. That compares to a mooted $45 billion valuation for Bytedance, owner of Toutiao, which has a smaller user base and no search engine.

    Toutiao may be sexier, but Baidu has advantages. It has proven deft at staying out of government trouble, where Toutiao keeps getting in hot water over inappropriate content. AI can help here, both by targeting news, video and advertisements more efficiently, and by scanning same for fraud, pornography or political criticism. Baidu claims its intelligent ad monitor can remove “bad” placements at a rate of 4,500 per minute. If Baidu can stay in the lead on this front, it might start pulling ahead again.

Breakingviews

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