Baidu: Why It's One Of The Best Chinese Stocks To Own

Key Points

• Baidu's income is at its highest level since 2021. 
• It's well-positioned to be an AI market leader in China. 
• Morgan Stanley just upgraded shares and sees at least a 35% upside. 

Rising geo-political tensions and a stunted post-COVID economic recovery have been two persistent headwinds that have led to Chinese stocks massively underperforming their US peers over the past eighteen months. While the tech-heavy NASDAQ index has already managed to gain about 40% this year, Chinese stocks, as tracked by the Invesco Golden Dragon China ETF NASDAQ: PGJ, are down 5%. But despite 2023 continuing to be a tough year for Chinese stocks, some clear opportunities are starting to emerge in individual names.

Baidu Inc NASDAQ: BIDU, known as China's answer to Google NASDAQ: GOOGL, is one such stock that is head and shoulders above the rest. For investors looking to gain exposure to the Chinese market with a view on the long-term potential, there are several key reasons to consider Baidu seriously. Let's jump in and take a look at them. 

Strengthening Financials

While its shares are still down 50% from the heights they hit back in February 2021, its most recent earnings report from last month gave several indications that the worst is over. Net income and earnings per share were at their highest level in two years, and both, along with topline revenue, easily surpassed analyst expectations, 

Wall Street was quick to spot the budding recovery in Baidu's ads and cloud business and took note of the bullish outlook shared by leadership. Since the release in the middle of May, Baidu has matched the Nasdaq's 12% gain, leaving the Golden Dragon ETF to just about tread water and stay flat over the same period.

Bullish Innovation

Alongside the strengthening financial situation in its core revenue streams, Baidu has several pokers in the fire regarding new and innovative technologies. A focus on AI initiatives such as Apollo Go and Ernie Bot, for example, couldn't be better timed given how hot AI has become.

Baidu is at the forefront of AI initiatives when it comes to publicly listed Chinese companies. Its Ernie Bot is a comparable technology to ChatGPT and is already enhancing Baidu's offerings across multiple products such as Search, Cloud, Wenku, and Maps. Its autonomous ride-hailing service, Apollo Go, is showing solid growth and delivered 660,000 rides in the first quarter.

Baidu is looking to become the largest fully driverless taxi network in the world, highlighting both its ambition and potential for disruption in the transportation sector. 

Recent Upgrades

So with more tailwinds starting to appear than headwinds, it's perhaps of no surprise that Morgan Stanley has just upgraded its rating on Baidu stock from Equal Weight to Overweight. According to the team there, China's AI evolution has reached a critical turning point, and Baidu is well-positioned to seize what they see as a $7.4 trillion AI internet opportunity.

Furthermore, their AI-enabled scenario indicates a potential 12% increase in core revenue estimates by 2025. The analysts also noted that regulatory approval in the near future could serve as a significant catalyst for Baidu's prospects.

And the best news? Their new price target is $190, echoing the upside MarketBeat's MarketRank tool has forecasted. Both indicate an upside potential of about 35% from where shares closed last night and should Baidu shares hit this in the coming weeks, it would put them at their highest level since 2021.

Remember, Baidu is currently trading at the same levels where it spent much of 2011 at. Even with its macro challenges, its growth potential has perhaps never been stronger. And compared to most of its Chinese peers, there's much to like about it.