The last few years have been challenging for most Chinese companies, with many seeing their market capitalization decline by more than 50%.
While most investors shun these Chinese companies, contrarian investors have been busy hunting for good companies that are trading at bargain prices. Baidu (BIDU -1.87%), a leading Chinese technology company, captured investors' attention lately. A combination of low stock prices and the prospects from its newer ventures in areas like autonomous driving and artificial intelligence (AI) seems promising.
Still, investors should not rush into buying the stock, at least not until they consider these two risks.
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Baidu's stock could be a value trap
Most bargain hunters are attracted to Baidu mainly because of its cheap stock valuation. To put it into perspective, it has price-to-book (P/B) and price-to-earnings (P/E) ratios of 0.9 and 11.1 times, respectively. Comparatively, Alphabet's P/B and P/E ratios are 6.7 and 23.4 times.
Baidu's low valuation, while tempting to bargain investors, is not without reasons. The company struggled to grow in recent years as its core search business faces issues like intense competition, a challenging economy, etc. For instance, in the latest quarter, revenue came in flat year-over-year, driven by a 2% fall in online marketing revenue and a 10% growth in non-marketing revenue (mainly AI Cloud business).
So, unless there is a clear turnaround in prospects and the company returns to growth mode, the stock could remain cheap for a prolonged period. If that happens, investors could end up losing on opportunity cost since the same capital could be invested in better opportunities. If Baidu's fundamentals worsen, the stock could become even cheaper, causing investors to lose money.
The silver lining is that Baidu has positioned itself in growth areas like AI and autonomous driving, which could drive future growth and stock prices. Still, investors should be convinced that these projects could enhance value in the long run. Otherwise, buying Baidu's stock solely on its low valuation is highly speculative, which is not intelligent for conservative investors to embark on.
Baidu's autonomous driving project might not live up to its expectations
One of the most significant potentials within Baidu's younger ventures is its autonomous driving business (Apollo Go). The company has been an early mover in this sector thanks to its heavy investment in research and development over the years. As such, this venture has moved beyond its early stages into the commercial phase, providing close to a million rides in the second quarter of 2024.
Still, Baidu's early investment in this industry does not guarantee it will be the ultimate winner in the long term. Competition, regulatory challenges, technology disruption, and market adoption are potential hurdles that could prevent the company from maintaining its leadership.
Internally, Baidu's track record in venturing beyond its search engine business has been average at best. For instance, while it was one of the earlier players venturing into the cloud computing business, it did not reach the top three spots in market share, which are currently held by Alibaba Cloud, Tencent Cloud, and Huawei Cloud. Some other ventures like Baidu food delivery and Baidu Wallet were outright failures that no longer exist today.
In other words, while autonomous projects seem promising, there is no guarantee that they will create shareholder value in the long run. Having autonomous driving technology is one thing, but to move beyond that to build a successful robotaxi business is an entirely different task altogether. It will take enormous capital and human resources, ongoing technology innovation, world-class execution, and plenty of luck for this venture to deliver its long-term promises.
In the short term, however, investors must be comfortable with Baidu's huge capital outlay to grow this venture, without which the company could have returned its excess profits to shareholders through dividends and share buybacks.
What does it mean to investors?
It's always tempting to buy cheap stocks, hoping the stock price can improve after buying. Yet, a stock can remain cheap for a long time until the underlying issues bothering investors get resolved.
In the case of Baidu, it has been facing challenges in growing its core search engine business in recent years. At the same time, its newer ventures, like the robotaxi, will need many more years before reaching scale and profitability.
So, unless there is a pickup in growth, Baidu's stock could remain cheap for a very long time.
