Naman Shukla is an Analyst at I Know First. He writes and invests in the stock market. Ranked in the top 8 percentile in TipRanks.com. Featured on SeekingAlpha.com, GuruFocus.com, Valuewalk.com among others.

BIDU Stock Price Prediction

Summary

Baidu’s shares plunged after it slashed Q2 revenue guidance.

The company still has many long-term growth drivers and is undervalued.

Growing Internet penetration in China and self-driving car can drive Baidu to new highs.

I Know First Algorithm is currently bullish on BIDU stock movement

Shares of Chinese Internet giant Baidu (BIDU) recently crashed after the company reported weak earnings report. One of the keys to successful investing is buying great companies on the pullback. In my opinion, Baidu is a massive company that will continue to dominate the Chinese Internet space for years to come. As a result, I think investors should use the recent dip to buy Baidu. Before making the long case, let’s take a look at the reason why Baidu’s shares plunged over 15% in the last few weeks.

Weak guidance

Internet services are the most significant platform for Baidu. In the most recent quarter, the company’s Internet services segment displayed robust performance and carried on delivering strong results. Overall searches surged 9 percent year over year, and online active marketing users reached to 587,000, as surge of 12 percent compared to that in first quarter of 2015.

The company faced severe problems previous year mainly due to the weak economic condition of China. However, it is highly likely that the Chinese economy will continue to fall further. But keeping in mind about more than 4.3 million small as well as medium sized companies in China, it offers a lot of prospect for unrelenting expansion of the company’s foremost top-line driver in the long term.

Moreover, users of the company’s mobile payments product and its non-core services surged by 15 percent and 19 percent, respectively, equated to its previous year’s same quarter. Transaction services also observed the gross merchant volume escalated 268 percent, although losses in this segment significantly gnarled the company’s bottom line.

All in all, Baidu’s quarterly results were good. However, the company’s guidance is what caused the shares to plummet in the next trading session. The company said it expects Q2 revenue of $2.807 billion-$2.823 billion, below prior guidance of almost $3 billion.

Reasons to be bullish

Baidu is effectively trading at a discount right now as compared to its historic valuation. Given the company’s growth prospects, I think investors should ignore the guidance cut and focus on the long-term. The company faced many problems due to the Chinese economy anxieties, but consensus still anticipates Baidu to escalate its yearly earnings by 32 percent over the upcoming five years.

Furthermore, keeping in mind the existing structural alteration of the Chinese economy, which comprises the growth of the service subdivision and high-tech industries, it is highly likely that the level of Internet penetration in China will increase at an appropriate rate in the future. According to estimates by Statista the Internet penetration is expected to grow at a steady pace in China and badiu should definitely benefit from it.

Online to Offline is a smart move

At present, Baidu accounts for almost 80 percent of market share in Chinese search queries. The company is the frontrunner in the Chinese Internet world. On the other hand, it can be certainly said that the company’s top-line will continue escalating at striking rate because there are hundreds of millions of Chinese citizens coming online every single day for the very first time.

Apart from this, the most significant thing about the company is its online to offline initiative. It means that users can perform any operation, such as buying tickets, food delivery, booking an Uber, and hotel reservations, on the Baidu’s page instead of moving to any other page.

But this service didn’t come cheap as Baidu had to spend a lot of money on R&D, and developing the platform. Throughout the last two years, R&D and SG&A expenses have surged around 150 percent and 230 percent, respectively. The company has put lot of efforts to persuade individual firms to use its online to offline service. However, the service appears to be paying off, as revenue surged by 54 percent in 2014, and additional 35 percent in 2015. With the platform already in place, Baidu should benefit from this service for years to come.

Autonomous vehicles

The Chinese tech giant has promised to launch driverless cars in China’s public transportation system in the next two years. Baidu has formerly verified its vehicles on Beijing’s highways and its vehicle performed well in the traffic and had successfully overtaken other cars on the highway by its own. However, the company is now on its way to perform a test on its driverless vehicles on United States roads.

The most significant benefit for Baidu is that it has a total support of the Chinese government, as it does not have any kind of barrier such as government regulations. Due to this, the company is rapidly expanding its driverless car tests. Moreover, Baidu also has a considerable figure of driverless car patents which could also help the company to generate some profit.

However, it cannot be definitely said how much revenue will be generated from the autonomous vehicles, but it will surely help the company in the long term. Given that autonomous car sector is expected to be a multi-billion dollar market (as evident from the pic below), Baidu can benefit greatly even if it commands a minor share of the market.

Conclusion

While Baidu’s prospects look bright, this is a stock for only long-term investors. Baidu’s initiatives will take a few years to materialize. However, I can see the stock doubling in the next two-three years, which is why I think long-term investors should make the most of the current dip by buying the stock.

My bullish stance on DDD is echoed by I Know First’s algorithmic forecasts. I Know First uses an advanced state of the art algorithm based on artificial intelligence and machine learning to foresee market performance for more than 3,000 markets including stock forecasts, world indices, commodities, interest rates, ETFs, and currencies. The algorithm generates a forecast with a signal and a predictability indicator. The signal is the number at the center of the box. The predictability is the figure at the bottom of the box. At the top, a particular asset is identified. This format is standardized across all forecasts. The middle number indicates strength and direction, not a price target or percentage gain/loss. The bottom figure, the predictability, signifies a confidence level.

16 June 2016

As you can see from the above image, the green 36.39, 84.28 and 429.48 shows that I Know First’s bullish signal for Baidu is very strong in the long-term, which resonates with my outlook as well.

In a previous forecast received by the algorithm, BIDU showed a bullish signal of 26.14 and a predictability of 0.22, achieving a return of 9.79% in the period of 7 days.