The Ultimate Contrarian Bet in AI

Summary

Baidu (9888-HK) is one of the most misunderstood and undervalued stocks in global tech. Trading at just 9x trailing P/E with 65% of its market cap in net cash and short-term investments, the market is pricing Baidu as a dying search business while ignoring its three explosive growth engines: 1. AI-Powered Search Reinvention – Baidu’s Ernie AI agents are processing 1.65 billion API calls daily, positioning it to monetize transactions, not just ads. 2. Cloud as the "Home Depot" for AI Apps – Baidu Cloud grew 26% YoY in Q4 2024, benefiting from China’s AI software boom. 3. Apollo Go: China’s Leading Robotaxi Play – With 9 million autonomous rides completed, Apollo Go is a hidden gem worth more than Baidu’s entire market cap. Target Price: HKD 140 by 2027 (70% upside) Catalysts: • AI-driven search monetization breakthroughs (2025-26). • Apollo Go expansion and potential spin-off. • $3.3bn remaining buyback (9% of market cap) by end-2025.

Thesis

A Rare Contrarian Opportunity in AI 1. The Market’s Misunderstanding: Baidu is NOT Just a Search Business Baidu’s core online marketing revenue is stagnating (~flat YoY), but this is already priced in (9x P/E vs. Alphabet at 20x). The market is missing three key shifts: A. AI is Disrupting Search – But Baidu is Leading the Pivot • Problem: Traditional paid search is declining as AI answers queries directly (22% of Baidu searches are AI-generated, up from 18% in Q3). Advertisers hate this—but Baidu is building a new revenue model. • Solution: Ernie AI Agents (679M monthly users) will monetize via transaction fees, not ads. Example: o The future business model could be that instead of showing hotel ads, Baidu books the trip and takes a 3-5% commission. o Instead of restaurant links, it reserves tables and processes payments. • Moat: Baidu has advertiser relationships + user scale—Tencent/Alibaba lack its search DNA. Tencent and Alibaba are also in a strong existing position and less likely to disrupt themselves. Baidu has no choice. B. Baidu Cloud: The "Home Depot" for China’s AI App Boom • Cloud revenue grew 26% YoY in Q4 2024 (hidden in "other revenues"). • AI democratizes software creation → more apps → more cloud demand. • Margin expansion ahead as AI tools reduce cloud operational costs. C. Apollo Go: A Free Call Option on China’s Robotaxi Future • 9 million autonomous rides (vs. Waymo’s 5M), yet valued at $0 by the market. • Regulatory edge: Full approval for driverless ops across China + Hong Kong. • Upside: If Waymo is being valued at 45 billion then ApolloGo could be worth $30-$50bn in a future spin-off. 2. Valuation: Cash Cushion + Buybacks = Limited Downside • Net cash and short term investments: RMB 155 billion (65% of market cap). • Buybacks: $3.3B remaining (9% of shares) by end-2025. • Dirt-cheap multiples: o P/E 9x (vs. 10-year avg. ~15x) o P/B 0.82x (vs. Tencent at 3.5x) 1. 3. Contrarian Edge: Sentiment is Rock Bottom • 52-week low: HKD 83 • Short interest negligible – no crowded bear trade. • Institutional ownership at 23% (vs. ~60% for Alibaba) – easy re-rating if thesis gains traction.

Risks

Why a lot of the Risks are in the Price. 1. Paid Search Erosion Faster Than AI Monetization • Bear Case: If AI search cannibalizes ads faster than transaction revenue scales, margins could compress and earnings go backwards. • Rebuttal: Baidu’s strong net cash position buys time to pivot (2+ years of R&D runway), and this concern is in the price. This is a key strength. The company has no debt, and isn't paying dividends. They are being careful as they chart their way forward. 2. Tencent/Alibaba Out-execute in AI Agents • Bear Case: WeChat mini-programs or Alipay integrate AI better. Both Alibaba and Tencent could quickly copy and business model innovation for their superior platforms. • Rebuttal: Baidu is in a sense fighting for its future and willing to disrupt its business in search of a new business model. Alibaba and Tencent are executing well and have a good business position and will be slower to pivot. 3. Geopolitical Overhang • Bear Case: U.S.-China tensions could relist Baidu from Nasdaq. • Rebuttal: HKEX listing (9888) mitigates delisting risk. 4. Apollo Go Fails to Scale • Bear Case: Robotaxis remain unprofitable. • Rebuttal: Even at a $5 billion dollar valuation versus $0 currently it could add 16% to the market capitalisation.

📈 Price Targets

• Baidu, Inc. Class A – Target: HKD 140.00 for 2027

Tags

• AI
• Value
• China
• Technology
• Cloud