EQUITIES UPDATE: Baidu - the momentum continues


Baidu: the momentum continues

The VFTP Global Thematic Portfolio has several companies reporting this week including Alphabet, Advantest, Gen Dynamics, Facebook, Airbus, Raytheon, and ICICI. In Asia, Baidu will be reporting their 2q 2018 earnings on Thursday which are expected to show good momentum from their strong 1q results posted in April.

According to Zack’s, sales are estimated to reach $4.05 b-$4.09 billion, indicating a 32% growth rate. Analysts are expecting that the company expect that Baidu will report full year sales of $16.37 billion for the current year. The search giant has seen a variety of broker upgrades going into this report on the back of potential stronger sales from its core business, primarily search and advertising revenue, and further monetization of AI technologies not only to improve its current offerings, but also to grow future product lines.

One element of the results that analysts are focusing on is the growth of “news feeds” on their Baidu app which is the search engine + tailored content generated by AI. This offering, which, was launched in 2016 has shown rapid growth and is expected to be a major revenue driver for the company going forward. According to a report written by KeyBanc, their field work checks are indicating, “a stronger ramp in news feed ad revenue driven by higher user engagement with daily active users of 150 million as of June and 30% year-over-year growth of total time spent in the second quarter of 2018."

Another area of interest will be the use of the Baidu’s Phoenix Nest system, an AI online marketing system which better directs ads to users. This was mentioned in the company’s 1q call and there is an expectation that eventually this could lead to higher advertising revenues from its traditional search business.

Of course, investors will also be interested in any developments in their major AI efforts: DuerOS and their AV project, Apollo. At the company’s recent developer conference, Baidu Create 2018, management outlined important updates on its self-driving program, primarily that it has achieved its goal of mass production of its AV mini-bus, the Apolong, in conjunction with Chinese auto manufacturer King Longans. The company plans to launch the bus service in fenced-around areas of several Chinese cities, including Beijing, Shenzhen, Pingtan and Wuhan.

It also announced a partnership with SB Drive, the autonomous driving subsidiary of SoftBank Group, to launch Apolong autonomous mini buses to Japan early next year. The announcement caught the eye Prime Minister Abe who remarked that they would be a major draw for the visitors coming to Tokyo for the 2020 Summer Olympics and Paralympic Games.

We also expect further updates on Baidu’s broad strategy of divesting in non-core businesses to concentrate on its efforts in AI. The company recently dramatically cut back on its operation in Brazil, going from a few hundred to just a handful of employees. This follows its withdraw from a couple of other international operations and off course, last years’ sales of its online travel and mobile take-away service.

The VFTP Thematic Model Portfolio holds Alibaba, Tencent and Baidu as core China technology plays. Baidu has outperformed this year and we expect this trend to continue. While Alibaba and Tencent are experiencing margin pressure, Baidu is experiencing solid momentum in its core search segment and is making significant progress in monetizing AI into traditional, and new, business lines.


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