After a gloomy period, China's Internet giant Baidu is regaining investors' interest. The company's AI business shows a tendency to replace its juicy advertising pillar.
Baidu (BIDU:NASDAQ), a pioneer among Chinese Internet companies, was once the country's most valuable Internet stock. After more than three years of sloppy performance, which saw it tumble to around USD 100 per share, Baidu has regained stock investors' favor – its stock rapidly surged to almost USD 300 in February 2021, a contrast to six months ago, when the price was merely USD 120. Baidu owns the biggest search engine in China; its advertising business contributes the most revenue to the company. However, the Internet climate is always changing – the once-biggest Internet giant in China is now more like an advertiser.
At the beginning of March, Baidu announced a 1-to-80 share split plan that is inferred as the company’s signal of its intention to go to a dual listing on the Hong Kong Exchange (HKEX). The share split may attract more investors and add more liquidity afterwards. After Baidu passed the HKEX hearing, the prospectus was released. Its Internet peers Alibaba and JD.com have been listed on the Hong Kong bourse since 2020 and their IPOs have made splashes to the ‘'Asian Nasdaq' and ignited investors' passion in the eastern hemisphere.
Before now, more than a dozen US-listed Chinese companies were dual-listed on HKEX. This 'salmon run' is a consequence of many factors. Firstly, the Sino-American trade war and the tightening regulations towards foreign companies have added uncertainties to Chinese companies and shaken some investors concerning the unstable market. To mitigate risks, Shanghai and Hong Kong become the best alternatives for US-listed Chinese companies. Along with Baidu's share-split plan, there is a rumor claiming that the Internet giant gained approval from HKEX for the second listing. Investors can expect to see BAT (Baidu, Alibaba, Tencent) on the same bourse in 2021 and make their own benchmarks on Chinese Internet behemoths' performance.
Over the past three years, Baidu's stock performance was disappointing, dropping from mid-2018's high at USD 270 to mid-2020's low at USD 80. The stock has bounced back rapidly since the end of 2020 and ramped up to a new high of USD 354 in February 2021. Along with the surge, Baidu's autonomous driving has been attracting massive attention. Before we mention the new AI business map of Baidu, we should outline how the company has cast a ponderous shadow over the online marketing business.
Similar to other Internet giants like Google and Facebook, the Chinese largest search engine company makes most of its revenue from online marketing business. In the company's quarter earnings conference call in March, Baidu disclosed CNY 107.1 billion revenue in 2020 and Baidu Core segment contributed CNY 78.7 billion to the total; net profit CNY 22 billion (non-GAAP). Baidu Core business includes online marketing services and products along with services from new AI business initiatives.
Online marketing from Baidu Core recognized CNY 66.3 billion in 2020. But the revenue generated from e-commerce has been declining since 2018. In the meantime, non-marketing revenue from Baidu Core demonstrates a strong signal of transformation. It is worthwhile mentioning that Baidu changed its position from "a leading search engine, knowledge and information centered Internet platform and AI company" to "a leading AI company with strong Internet foundation" in the fourth quarter earnings announcement. The non-marketing business is not big enough to support the company’s operation, but the company has determined its future path – to become an AI company.
In terms of making profits from marketing, or say traffic, Internet companies are more ambitious than to remain mere advertisers. Google has many businesses other than Google Ads; Facebook sets foot in AR/VR and crypto investments; ByteDance is exploring opportunities in education, e-commerce and other fields. Baidu has built the largest AI-developer platform and its autonomous driving program Apollo is notable worldwide, tied with Google's Waymo.
China's AI development is already full speed ahead. Along with digital transformation and industry intelligentization ongoing in China, AI's penetration is increasing across industries. The Internet field has the highest AI penetration given the industry has the best foundation to adopt AI: well-framed IT environment, data generator, AI talents and so on. Estimated by China Academy of Information and Communication Technology (CAICT), China's AI industry market size will reach USD 27.7 billion by 2022.
Behind the strong momentum, Chinese Internet giants are pioneering the AI game – and Baidu is a forerunner among them. Being a tech-savvy firm, Baidu applied for the most AI patents among all companies and research institutes in China. It has been granted the most AI patents as well. In the past decade, Internet and ICT companies led the tech innovation in the AI field while partnering with research universities like Tsinghua University and Zhejiang University.
Companies and research institutes are actively seeking AI's applications in real life, including civil management, entertainment and business automation. Especially for Internet companies, which have the most computer science talents, they have integrated AI technology into their services or products for clients and self-use. Major cloud computing providers have developed the AI product matrix. Among the selected Chinese Internet companies with a notable presence in the IaaS market, Baidu Cloud is an apparent leader in terms of AI product counts.
Noticeably, Baidu is the biggest AI open platform with 2.65 million developers. From a search engine firm offering advertising services to an AI enabler, Baidu made the AI strategy decision a decade ago. In the past decade, the company gradually embedded AI capabilities into its core business and invested heavily in new initiatives.
The company's AI business is yet to return profits, but the strategic move has set the foundation for future growth. Baidu provides full AI stack solutions to clients and developers. Beyond a toolbox supplier, the company has ambitions in the automobile area – the intelligent driving vehicle. Baidu announced in January this year that it cooperated with Geely, the Chinese owner of Volvo, to leverage its smart automobile business. The joint venture named Mobike co-founder Xia Yiping as the CEO to lead the new AI+EV brand.
Thanks to Tesla and NIO, the EV concept stocks yielded great returns in January. Along with the EV news, Baidu's stock kept climbing up with investors' increasing passion towards EV and AI at the beginning of the year. However, the EV news is merely a trigger for the surge. Baidu had long been undervalued and the EV buzzword brought it back under the spotlight. The company has been investing heavily in AI and intelligent driving for a decade. The company's intelligent project Apollo has accumulated 4.3 million test miles with 199 driving licenses in China. Though Apollo is arguably the best intelligent driving project in China, its overseas counterpart Waymo is piloting from the front.
Baidu is no doubt the tier-1 AI company in the world with remarkable and evolving capabilities. However, talent retention is a critical problem that Baidu has been facing over the past several years. The Chinese professional network platform Maimai conducted research on talent flow among Chinese Internet companies and discovered that Baidu was the main contributor to Internet companies' talent acquisition.
Besides the general talent flow, Baidu said farewell to at least 10 top-level R&D scientists and engineers and more than 20 senior veterans and executives (VP and above). Its Chief Scientist Andrew Ng left in 2017 to initiate an AI business; ex-COO Lu Qi left in 2018 to launch startup incubators and now he is the head of MiraclePlus; the SVP Xiang Hailong’s departure in the mid-2019 gave a strike on Baidu's share price. Senior- and C-level talents’ leaving, on the one hand, is a loss for the company in terms of human resources, but on the other hand, the new power gets the chance to sprout along with the radical change in management level – though the process is risky.
The AI-driven business has strong momentum and it is expected to replace the advertising arm to be the main revenue pillar in the short future. Baidu's non-marketing business revenue was only 3.7% of its marketing revenue in 2017, but the ratio rose to 18.7% in 2020. Behind the change in figures, Baidu is lavish on research and development (R&D). In 2018–2020, the company spent 15.4%, 17.1% and 18.2% of the revenue on R&D respectively. The scaling R&D expenditure was in line of the growth of R&D headcount.
As one of the oldest Internet companies, Baidu has entered its third decade. In the first ten years of the company, it grew with Chinese Internet development and became, and still is, the biggest search engine in China; in the second decade, Baidu fell behind the 'Mobile Internet' competition but it fell to its 'All in AI' strategy; in the third decade, Baidu needs time to prove the AI strategy's business value.
With the rise of Tencent's WeChat and ByteDance's TikTok and Douyin, Baidu's advertising business has encountered the biggest crisis since its birth. Traffic is no longer a unique competitive advantage of the company and the search engine business has lost investors' interest. But this is not the end of the story. Like FAANG to American fresh graduates, BAT's attraction to Chinese young workers is the same. After decades of operation, Baidu has the reputation to attract young blood to the company and the accumulation in technology prepares Baidu well to initiate its AI business.
While expanding its R&D team, Baidu is effortlessly building the AI ecosystem to draw a big picture from investing startups in the field to provide AI open platforms for the community to exchange ideas and collaborate. If AI is the future, no one can bypass Baidu in China.