In the Internet ecosystems of the world’s two largest economies – the US and China – things work very differently.
That’s particularly true of online search, which in China is dominated by local tech giant Baidu Inc (HKEX: 9888) (NASDAQ: BIDU).
With the intent of reinventing itself and moving away from its reliance on search, over the past decade the company has actually morphed into a firm focused on Artificial Intelligence (AI) and its many applications in the real world. Throw in a burgeoning cloud business and Baidu looks strikingly similar to its US counterpart, and Google owner Alphabet Holdings (NASDAQ: GOOG).
However, it could be argued that Baidu was more prescient than Alphabet by focusing on the potential of AI as early as 2010.
So, for investors interested in the nascent AI industry in China, what should they know about Baidu?
Baidu – China’s Online Search Monopoly
Baidu was only founded at the turn of this century – in 2000 – in Beijing, China.
Current CEO Robin Li was one of the co-founders and he served as Chairman from 2000-2004 before taking over as CEO, a post he has held ever since.
In its early days – as soon as 2001 – Baidu was allowing advertisers to bid for ad space. This novel approach to online advertising, where advertisers paid per click, allowed Baidu to quickly build up a dominant position in online search in China.
By the time Google launched in China in 2006, Baidu held a market share of well over 40%. Even the now-defunct Yahoo! ranked ahead of Google in terms of its market share of online search in China at the time. When Google finally pulled out of China in 2010, Baidu’s market share of online search in China was over 70%.
Baidu’s US IPO And Listing History
It’s not well known but Baidu was one of the first Chinese technology firms to list in the US. It carried out its initial public offering (IPO) on the Nasdaq exchange in New York, all the way back in 2005.
The Chinese firm was also one of the first Chinese firms to use a variable interest entity (VIE) structure to list its shares in the US.
Baidu shares were priced at US$27 in its 2005 IPO and soared over 300% on its first trading day. In 2010, the company carried out a 10-for-1 stock split. Today, its US-listed shares sit at around US$125 (although that would be US$1,250 if compared directly to its 2005 IPO price).
Meanwhile, its Hong Kong listing – which was only carried out in March 2021 – saw Baidu raise around HK$24 billion (US$3.1 billion) as the company became a dual-listed stock.
However, as Baidu unfortunately carried out its Hong Kong listing at the peak of the 2021 Chinese tech bubble, its shares have more than halved and now sit around HK$122, down from the HK$252 offer price.
Baidu Core & iQIYI
What about Baidu’s actual business today? Well, it’s split into two core segments that management have named Baidu Core – which includes its online ad, AI initiatives and autonomous driving businesses – and iQIYI.
The “Netflix of China”, iQIYI is a streaming business that is 53%-owned by Baidu. It also has its own listing on the US-based Nasdaq exchange. However, more recently, iQIYI has been under scrutiny from US regulators and there’s talk that it could soon be delisted.
Given threats over the validity of Baidu’s own VIE structure in the US, most investors who want exposure to Baidu are now purchasing its Hong Kong-listed shares. Baidu Core continues to drive the revenue and profit of the overall business, accounting for over 70% of Baidu’s revenue over the past three years.
Its search position in China is dominant – it has over 657 million monthly active users (MAUs) of its Baidu app – allowing the company to use the profits to fund its other ventures.
Two of those that are showing promise are AI and autonomous driving. In May of this year, Baidu revealed that its autonomous ride-hailing service (Apollo Go) had provided 660,000 rides in the first three months of 2023. The service had also received Beijing’s first permits to operate ride-hailing services without a driver or safety operator in the vehicles.
Meanwhile, its AI chatbot – Ernie Bot – has been gaining traction and positive reviews, with management keen to expand its use to other parts of its business, including its fast-growing cloud segment.
Mature Business That Is Focusing On AI And Autonomous Driving
Baidu’s overall business strategy is extremely similar to Alphabet in the sense that its search engine is the cash generator, while its other business segments are the ones that will drive future growth.
Indeed, in Q1 2023, Baidu brought in revenue of RMB 31.1 billion (US$4.5 billion) and saw an operating cash flow of RMB 5.8 billion. The company will likely benefit from China’s push and support for AI although it also faces stiff competition in the area from the likes of Tencent and Alibaba.
However, its extensive R&D in the area and early deployment of AI technology mean that it’s well-positioned to benefit in the years ahead.
For investors interested in the growth and development of AI in China, Baidu is certainly one of the leading companies in the space to monitor.
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