Target price of $170! BIDU-SW is expected to outperform the industry in various businesses with the help of AI.

BIDU-SW's first-quarter performance exceeded expectations, with Guojin Securities stating that BIDU-SW's core business has recovered well and AI will drive the company's long-term development in combination with various businesses.

Long-term LLM and other technologies will continue to drive advertising revenue growth, and cloud services will provide diversified services for traditional enterprises to migrate to the cloud, with profits continuing to be released. The launch rhythm of Wenxin's words depends on the development of the industry, and the impact of model training on profit margins is controllable.

Q2 Outlook

It is expected that BIDU-SW's core business revenue in Q2 will increase by 15% YoY to RMB 26.57 billion, with advertising/cloud/new businesses increasing by 14%/15%/23%, respectively.

Advertising growth rate is significantly higher than GDP growth rate, and cloud business growth rate is faster than the industry.

It is expected that the adjusted operating profit margin will be 24%, and the profit margin will continue to be optimized by 1 percentage point compared to Q1 due to the accelerated growth of advertising revenue. The profit trend of cloud business is consistent with Q1.

It is expected that BIDU-SW's advertising growth rate will be 8.3% in 2023, which will continue to be higher than GDP growth.

Investment Advice

JPMorgan has raised BIDU-SW's core business operating profit expectations for 2023/24 by 15%/5%, and adjusted the valuation to 2024, based on a 10-year DCF (corresponding to a 12x 2024 advertising business P/E ratio) and a 2x 2024 market-to-sales ratio for AI-related businesses.

JPMorgan has raised its target price for BIDU-SW from $166/161 HKD (9888 HK) to $170/165 HKD, corresponding to a P/E ratio of 17/15 times in 2023/24, and maintains a buy rating.

Guojin Securities expects BIDU-SW's revenue in 2022/2023/2024 to be RMB 139.9/155.0/170.4 billion, with Non-GAAP net profit attributable to shareholders being RMB 23.7/26.2/30.0 billion, and the current stock price corresponding to Non-GAAP P/E ratios of 13.07/11.78/10.28x. It maintains a "buy" rating.