Can China’s interest rate hike lift Baidu shares after Q4 earnings?

The Baidu share price has had a good start to 2022, helped by demand for its AI services and fewer fears about the Chinese government’s crackdowns, but a package of government measures could equally lift the stock.

Chinese internet and artificial intelligence giant Baidu [BIDU] is expected to report a 40% drop in year-over-year earnings, but a 9% climb in revenues when it releases its fourth-quarter results on 1 March.

Analysts at Zacks Equity Research forecast that the group, which controls around 70% of the country’s internet market, will post earnings of $1.89 per share and revenues of $5.04bn.

Despite the drop in earnings, Baidu’s share price is expected to rise following a package of government measures — including a cut in interest rates — to pump prime the slowing Chinese economy and stimulate business and consumer demand.

Rong Luo, CFO of Baidu, said at its Q3 announcement: “With a diversified AI portfolio, including cloud services, smart transportation, smart devices, self-driving, smart EV and robotaxi, we are well positioned for long-term growth.”

Baidu’s AI enterprise cloud services have continued to perform well. Ariel Investment’s Rupal Bhansali points out that this increased focus on B2B rather than B2C will “less likely draw the ire of Beijing’s regulatory authorities”. It is also more “lucrative, less competitive than the Chinese B2C internet sector”.

Baidu rides the crackdown

Last year saw a government crackdown on big tech, including regulatory restrictions around video gaming hours, data privacy and anti-competitive practices. These measures, as well as the slowdown in the Chinese economy following its zero-Covid policy, saw Baidu’s share price slump by 49.6% over the past 12 months.

However, since the start of 2022 through to 25 February, it has climbed 2.9%.

“In a nutshell, we think the worst of the tech regulatory storm is behind us, even though the regulatory upgrade is not yet over,” analysts at Société Générale said recently, as reported by Reuters. “2022 should bring fewer bad surprises and thus less uncertainty.”

Baidu has also been boosted by its AI autonomous driving prospects. Its electric vehicle arm Jidu Auto, which it runs as a joint venture with Chinese carmaker Geely [0175.HK], raised nearly $400m in funding in January. It said that it hopes to deliver its mass-produced ‘robot’ cars in 2023.

In comparison, its peer Alibaba’s [BABA] share price dropped 9.1% since the start of the year, while Tencent Holdings [700.HK] was down 8%. Baidu has a 10.33% weighting in the Invesco Golden Dragon China ETF [PGJ], which has seen its shares fall by 9.8% year-to-date.

Baidu and the industrial internet

In its third quarter Baidu reported revenues of $5bn, up 13% year-over-year, beating forecasts of $4.9bn. On an adjusted basis Baidu earned $2.32 per share, compared with forecasts of $2 per share.

The rise in revenues was helped by an agreement with the city of Tongxiang to build an industrial internet platform and equip its manufacturing enterprises with Baidu AI solutions.

In addition, Chinese EV maker WM Motor signed an agreement to install Baidu’s Apollo Navigation Pilot assisted driving system in its W6 SUV model. This, Baidu said, takes “the total makes that have partnered with Apollo for self-driving and infotainment solutions to 31”.

However, the group warned that China’s regulatory crackdown and the ongoing impact of the pandemic would weigh on advertising sales in the coming quarters. “Our ad spend has been impacted by sectors like education, real estate and home furnishings, travel and franchising as we expect this headwind to continue in the near term,” said CEO Robin Li (pictured above). The company’s shares fell 6% following the announcement.

Wall Street expectations

According to CNN, analysts expect Baidu to report revenues of $32.3bn in the fourth quarter.

Analysts and investors will have a careful eye on the group’s advertising revenues. Will Baidu’s Q3 warnings come to pass or will the government’s stimulus boost demand? If the advertiser numbers are solid, then expect the Baidu share price and other tech-related stocks to rise.

Looking forward, according to MarketScreener, analysts have a ‘buy’ rating on the stock. Morgan Stanley has a base target price of $190 with a high of $370, a considerable upside on its closing price of $153.71 on 25 February.

“Baidu is well positioned in certain industrial applications. We also like its rich cash position and strategic investments,” said Gary Yu, equity analyst at Morgan Stanley. “Despite upside potential, we remain on the sidelines owing to near-term ad industry weakness, macro headwinds and Covid-19 uncertainties.”