Baidu, Inc. (BIDU): Best Undervalued Stock to Buy According to Hedge Funds?

We recently compiled a list of the 10 Best Undervalued Stocks To Buy Now. In this article, we are going to take a look at where Baidu, Inc. (NASDAQ:BIDU) stands against the other undervalued stocks.

Demographic Shifts and AI Innovation: A Bullish Case For the US Market

In the prior couple of years, experts and analysts were worried about a recession in the US and their best-case scenario was a soft landing. Experts are still predicting the latter. However, 2024 has proven to be quite a healthy year for the US stock market as it recently hit new highs on the back of technology stocks. Moreover, we also saw notable market broadening in the latest earnings season. However, Co-Founder and Head of Research at Fundstrat Global Advisors, Tom Lee is not just bullish on the current year but also sees the US stock market almost tripling by the end of the decade.

On June 26, Lee told CNBC that he believes the S&P 500 could reach 15,000, driven by a combination of demographic trends and technological advancements. He compared today's market to past periods of rapid growth, such as the 1920s and the 1950s-1960s. He credits the potential surge to an increase in the population of prime-age adults (30 to 50 years old), which is now led by Millennials and Gen Z. As these generations enter their peak earning years, their borrowing and spending are set to increase, and they are going to take major life decisions which are expected to drive economic growth.

In addition to these demographic factors, Lee highlights the transformative impact of artificial intelligence (AI) on the economy. He believes that AI presents a significant opportunity for US technology companies, especially as it addresses a global labor shortage by converting labor costs into technological solutions, which would probably boost the US tech sector revenues. Furthermore, the US, with its leading technology sector, is well-positioned to attract substantial global investment, especially as we see that other regions like China and Germany face demographic and economic challenges.

Despite Tom Lee’s optimism, he acknowledged several risks to his bullish outlook. He said that a global recession could undermine growth, and the development of AI could also backfire or cause geopolitical instability. Additionally, there is the potential for the stock market to peak prematurely, forming a bubble.

Despite the risks, Tom Lee predicts an optimistic outlook for the US market in the current decade. Based on his insights, this could be an ideal time to invest in the market for the longer term. Keeping in mind that Lee predicts good things for the future of AI, you can take a look at the 10 Best Artificial Intelligence Stocks to Buy Under $10.

Our Methodology

For this article, we identified over 40 stocks that were considered undervalued by other financial media websites. From that list, we narrowed our choices to 10 stocks whose forward PE ratio was either equal to or below 15 or was below their industry average, as of June 24. We listed the stocks according to their hedge fund sentiment, which was taken from our database of 920 elite hedge funds as of Q1 of 2024.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A modern internet space with a person using Baidu services on a laptop.

Baidu, Inc. (NASDAQ:BIDU)

Forward PE as of June 24: 7.94

Number of Hedge Fund Holders: 48

Baidu, Inc. (NASDAQ:BIDU) provides internet search services and products in China, including the Baidu App, Baidu Search, Baidu Wiki, Baidu Experience, Baidu Post, and more. The stock was part of 48 funds’ portfolios and the total stake value was $1.427 billion in the first quarter. As of March 31, Alkeon Capital Management is the biggest shareholder in the company and has a position worth $240.764 million. Baidu is the 4th best-undervalued stock to buy on our list.

Baidu (NASDAQ:BIDU) is making a transition from an internet-centric business to an AI-first business. At the group’s Q1 2024 earnings call, management highlighted its focus on improving its large language model (LLM), ERNIE. Baidu is aggressively promoting ERNIE in both its consumer (mobile ecosystem and other customer-oriented products) and business (AI cloud, autonomous driving, and robotaxi) segments to enhance user experience, increase advertiser return on investment (ROI), and enable developers to create efficient applications. Despite challenges in its legacy business, Baidu remains confident that AI will drive long-term revenue and profit growth. Baidu is building a strong ecosystem around ERNIE that aims to incorporate millions of applications developed by a diverse community of enterprise and individual developers.

In addition to LLMs, Baidu is also working on autonomous driving technology. The market for autonomous driving systems is expected to grow at a compound annual growth rate of 32% over the next 6 years and reach nearly $39 billion by 2030 (as per estimates by Fortune Business Insights). Baidu will benefit from this high-growth market as its autonomous ride-hailing service, Apollo Go, continues to gain popularity. Apollo Go offered about 826,000 rides in the first quarter, up 25% year-over-year. The service is progressing toward unit economics breakeven, meaning that each ride will generate enough revenue to cover its costs, especially in Wuhan. In Wuhan, it operates 24/7 and plans to deploy the sixth-generation Robotaxi, RT6.

According to analysts, Baidu is trading at an attractive valuation with a forward PE ratio of 7.94, compared to an industry average of 12.32. Over the last 3 three months, based on consensus estimates of 19 analysts, the company stock is a Strong Buy, and their average price target of $150 shows an upside of nearly 70%, as of June 24.

Ariel Global Fund stated the following regarding Baidu, Inc. (NASDAQ:BIDU) in its first quarter 2024 investor letter:

“Alternatively, several positions weighed on performance. China’s internet search and online community leader, Baidu, Inc. traded lower alongside Chinese equities as intensifying problems in China weighed on investor sentiment during the period. The company continues to invest heavily in Artificial Intelligence (AI) and recently launched its generative AI, Ernie Bot, aimed at rivaling Open AI’s ChatGPT. While monetization of the new technology is largely dependent on regulatory review, we think Baidu should continue to experience margin improvement with the ongoing implementation of efficiency and profitability initiatives. While some investors remain on the sidelines due to uncertainty surrounding China’s economic growth, government regulations, and the political rhetoric towards Taiwan, we remain enthusiastic about Baidu’s longer-term opportunity for revenue growth and margin expansion across internet search, cloud, autonomous driving, artificial intelligence and online video.”

Overall BIDU ranks 5th on our list of the best undervalued stocks to buy. You can visit 10 Best Undervalued Stocks To Buy Now to see the other undervalued stocks that are on hedge funds’ radar. While we acknowledge the potential of BIDU as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than BIDU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

 

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Disclosure: None. This article is originally published at Insider Monkey.