On Friday, Mizuho (NYSE:MFG) Securities adjusted its outlook on Baidu (NASDAQ:BIDU), reducing the stock's price target from $115.00 to $105.00, while retaining an Outperform rating. The adjustment comes in response to Baidu's core operating income surpassing expectations, which has been attributed to enhanced cloud profitability and stringent cost management. These factors have helped offset the broader macroeconomic challenges that continue to impact the advertising sector.
Despite the headwinds in advertising due to a weak macroeconomic environment, Baidu has sustained double-digit growth in its Cloud revenues. Notably, Generation AI (Gen-AI) technology now represents 9% of the company's revenues and is showing progress in Autonomous Driving (AD) development. Mizuho acknowledges Baidu's efforts to integrate Gen-AI into its search functions to maintain a competitive edge.
However, due to the persistent macro challenges and the company's strategic focus on Gen-AI, Mizuho has revised its forecast for Baidu's FY26E Core EBITDA downward by 5%, setting the new expectation at 32 billion RMB. Despite the reduction in the price target to $105.00, the firm maintains an Outperform rating, suggesting a valuation of 5 times FY26E Core EBITDA for the company.
The current market valuation of Baidu stands at just 3.5 times FY26E core EBITDA, a figure that reflects the negative sentiment surrounding the Chinese market. Mizuho, however, sees potential in Baidu's Gen-AI initiatives. The firm suggests that the successful development and application of Gen-AI technologies could add as much as $30 per share to Baidu's stock price, viewing it as a "free call option" with compelling prospects.
In other recent news, Baidu Inc (NASDAQ:BIDU). reported a slight decline in total revenues for Q3 2024, amounting to RMB33.6 billion. Despite a decrease in advertising revenue, Baidu's AI Cloud business grew by 11%, driven by AI-related revenue. This growth is expected to continue into Q4, according to Tiger Securities. The company's AI-first strategy remains a key focus, with significant advancements in AI-driven product transformation and autonomous driving technology.
Benchmark and Tiger Securities both adjusted their price targets for Baidu, while maintaining a Buy rating. Both firms anticipate revenue growth re-acceleration in 2025, driven by improved macroeconomic conditions and plans to enhance monetization of AI technologies.
Baidu continues its share buyback program, with $161 million of shares repurchased since early Q3. These are recent developments that highlight Baidu's ongoing commitment to AI and technology as it navigates a challenging macroeconomic environment.
InvestingPro Insights
Baidu's financial metrics and market performance offer additional context to Mizuho's analysis. According to InvestingPro data, Baidu's market capitalization stands at $28.62 billion, with a P/E ratio of 10.8, significantly lower than many of its tech peers. This low valuation is further emphasized by the company's price-to-book ratio of 0.8, suggesting the stock may be undervalued relative to its assets.
Despite the challenging macroeconomic environment mentioned in the article, Baidu has maintained a revenue of $18.55 billion over the last twelve months as of Q2 2024, with a gross profit margin of 51.5%. This aligns with Mizuho's observation of Baidu's effective cost management and improved cloud profitability.
InvestingPro Tips highlight that Baidu's earnings per share have grown over the past year, and analysts predict the company will be profitable this year. These insights support Mizuho's Outperform rating, despite the lowered price target.
For investors seeking a deeper understanding of Baidu's potential, InvestingPro offers 15 additional tips that could provide valuable insights into the company's prospects amidst the evolving AI landscape and market challenges.
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