Baidu Beats Revenue Estimates; Announces to Acquire JOYY’s Chinese Live Streaming Unit

Baidu, a leader in the Chinese search industry in terms of user market share, reported better-than-expected revenue in the third quarter as the world’s second-biggest economy emerged from its COVID-19 slump, helping revenue from advertising to gain momentum.

Chinese search engine leader also said it will acquire JOYY’s live streaming business in China, which includes YY mobile app, YY.com website and PC YY, among others, for an aggregate purchase price of about $3.6 billion in cash. The deal is expected to occur in the first half of next year.

Baidu’s total revenue increased 1% year-over-year to 28.23 billion yuan ($4.29 billion), beating market expectations of 27.45 billion yuan. One of the largest AI and Internet companies in the world forecasts fourth-quarter revenue between 28.6-31.3 billion yuan, in the range of Wall Street consensus of 28.98 billion yuan.

Baidu’s U.S.-listed shares closed 1.9% higher at $147.84 on Monday; the stock is up over 15% so far this year.

Executives’ Comments

“Our revenue growth turned positive in the third quarter with many advertising verticals turning around, putting Baidu in a good position to further benefit from a recovery in the Chinese economy. Our new AI businesses saw healthy growth in the third quarter, particularly from the cloud, where we are differentiating with AI solutions,” said Robin Li, Co-founder and CEO of Baidu.

“Our focus on differentiating Baidu with open-platform, in-app search and new AI businesses has enabled Baidu Core’s adjusted EBITDA margin to reach 46% in the third quarter. We also executed on our capital allocation strategy by selling down equity investments and continuing to execute on our share repurchase plan,” said Herman Yu, CFO of Baidu.

Baidu Stock Price Forecast

Eight equity analysts forecast the average price in 12 months at $159.25 with a high forecast of $182.00 and a low forecast of $130.00. The average price target represents a 7.72% increase from the last price of $147.84. From those eight analysts, six rated “Buy”, two rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $130 with a high of $196 under a bull-case scenario and $84 under the worst-case scenario. The firm currently has an “Equal-weight” rating on the leading Chinese search engine’s stock. Baidu had its price target increased by The Goldman Sachs Group to $162 from $144. They currently have a buy rating on the information services provider’s stock.

Several other analysts have also recently commented on the stock. Barclays raised their price target on shares of Baidu to $140 from $130 and gave the stock an equal weight rating. Benchmark reissued a buy rating and set a $165 price objective. Bank of America lowered their price objective to $175 from $186 and set a buy rating.

Analyst Comments

“Top-line growth slowdown amid risks from the competition. Baidu could generate slower-than-peer revenue growth before AI initiatives materialize. Well-positioned to ride the next Internet wave, but patience needed. We like Baidu’s long-term roadmap for AI and industrial application initiatives (i.e., autonomous driving, IoT ecosystem) with commercialization on the way, which we view as a long-term positive,” said Gary Yu, equity analyst at Morgan Stanley.

“Equal-weight on an industry-relative basis. We like Baidu’s rich cash position and strategic investments but expect macro issues and competition to shadow top-line growth near term. Our price target implies 15x our NTM non-GAAP P/E, the midrange of its historical 11-24x trading band since 2019,” Yu added.

Upside and Downside Risks

Risks to Upside: 1) Stronger core business recovery beyond current disruption to drive better top-line growth. 2) Solid margin expansion from investment discipline and cost control – highlighted by Morgan Stanley.

Risks to Downside: 1) Intensifying competition in search and online video, driving up traffic acquisition costs and more aggressive content investments. 2) Potential regulation on the news feed, healthcare, education, and gaming industries, limiting ad revenue growth.

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