Baidu (NASDAQ: BIDU), the Chinese tech giant that owns the country’s largest search engine, went public in 2005. If you had invested $5,000 in its IPO, your stake would be worth around $330,500 today.
Baidu’s gains have been impressive, but they were mostly made in the first ten years after its IPO. Over the past five years, Baidu‘s shares have risen only 10%, while the NASDAQ has almost tripled.
Let’s take a look back at the evolution and expansion of Baidu’s business, why the bulls have seemingly lost interest in the stock, and where it might go from there.
Google’s pain created Baidu’s gains
Baidu generated breathtaking growth after its IPO. Between fiscal years 2005 and 2010, its annual revenue grew from $39.6 million to $1.2 billion, representing a CAGR (compound annual growth rate) of 97.8%.
Alphabetit is (NASDAQ:GOOG) (NASDAQ:GOOGL) Google was once Baidu’s main competitor, but it abruptly left mainland China in 2010 after a clash with the government. The departure of Google enabled Baidu to conquer the national search market and truly become the “Google of China”.
Like Google, Baidu has extended its ecosystem beyond its main search engine with web portals, online maps, cloud storage services and investments in other websites. Between 2010 and 2015, its annual revenue grew from $1.2 billion to $10.2 billion, representing a CAGR of 53.6%.
But then the problems started piling up
But Baidu’s growth slowed significantly over the next five years, with a CAGR of only 9.9% between 2015 and 2020. This slowdown can be attributed to four main factors.
First, China’s Cyberspace Administration probed Baidu in 2016 following the death of a university student who purchased unapproved drugs through Baidu’s advertisements. This investigation led to tighter restrictions on Baidu’s healthcare advertisements, which hampered its revenue growth over the following year.
Second, domestic search engines like Qihoo 360, Sogo, and Ali Babait is (NYSE: BABA) Shenma started gaining traction against Baidu. Meanwhile, new advertising challengers, including Tencentit is (OTC: TCEHY) messaging platform and WeChat Mini Programs, ByteDanceJinri Toutiao’s newsreader and short video app Douyin (also known as TikTok overseas), and bilibilifrom the Gen Z-oriented digital media platform – all of which have begun to drive users and brands away from traditional search engines.
Third, Baidu has over-diversified its business to keep pace with Alibaba and Tencent. To streamline its operations, it divested several of its weaker businesses, including its fintech division and its stake in online travel agency Ctrip, which reduced its annual revenue.
Finally, China’s economy stagnated, growing at its slowest pace in 29 years in 2019 before being hit by the pandemic in 2020. These macro headwinds further reduced market appetite for Baidu’s ads. .
Where does Baidu go from here?
Baidu’s days of greatest growth may be over, but it continues to evolve and expand. It is diversifying its advertising business away from traditional search ads with Managed Pages, which integrates a company’s website into its cloud-based services, and its BJH content creation platform. It will also expand its live streaming ecosystem with its planned purchase of YY Live from JOY (NASDAQ:AA).
Baidu Cloud still ranks a distant fourth in China’s cloud infrastructure market, but is growing much faster than its core advertising business, according to Canalys. It also continues to plant the seeds for its future growth with its investments in DuerOS, its cross-platform virtual assistant; Apollo, its software platform for autonomous vehicles; and its joint ventures in electric vehicles.
Bulls believe these new growth drivers, along with the gradual recovery of its advertising business in a post-pandemic world, will breathe new life into Baidu’s stock. The bears believe that Baidu will continue to struggle against bigger and more nimble tech companies like Tencent, Alibaba, ByteDance and Bilibili.
Baidu is also facing regulatory threats in China, which has curbed its top tech companies, and in the United States, which could delist Chinese companies that fail to comply with new audit rules within the next three months. years. These challenges may overshadow any fundamental improvement in Baidu’s business.
The road ahead
Baidu has generated bountiful returns for its early investors, but it has been a lackluster investment in recent years. Baidu shares look cheap at 16 times forward earnings, but they won’t get much of a premium unless its growth picks up, it widens its moat and regulatory headwinds ease.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.