Baidu: Wide-Moat Search Business with Artificial Intelligence Optionality

Felix Narhi presented his in-depth investment thesis on Baidu (Nasdaq: BIDU) at Wide-Moat Investing Summit 2017.

Baidu is the leading Chinese language Internet search provider. Baidu’s core search platform is a cash cow protected by a deep moat, whose functionality continues to serve a fundamental need for society as more information is digitized. In addition to core search, Baidu owns the leading online video platform in China (iQiyi), a 20% stake in the leading Chinese online travel agency (Nasdaq: CTRP), plus other investments with optionality.

On a sum-of-the-parts basis, Felix estimates BIDU’s core search to be attractively valued in a range of 7-12x normalized pretax profits, depending on the values derived for privately held investments. The stock is attractively priced because of some transitory setbacks in search last year and monetization concerns of non-core segments. This narrative should improve in the coming year as non-core losses fade and search revenues recover. Importantly, Felix believes Baidu’s status as China’s leading artificial intelligence (AI) enterprise is underappreciated by many investors because there is little to no upside from potentially game-changing initiatives baked into the stock price. In essence, an investor gets Baidu’s AI-driven world-class capabilities, including autonomous driving (Project Apollo), conversational computing (Duer), and enterprise cloud for free at recent prices. Felix believes the stock’s modest valuation range provides some foundational downside support, while AI provides potentially multi-fold upside over the medium term.

Note: Felix Narhi discussed Baidu in a session that also included David Barr, President and CEO of Pender, discussing Mattersight Corporation (Nasdaq: MATR).

About the instructor:

Felix Narhi is the Chief Investment Officer of Pender. He is the Portfolio Manager of the Pender US All Cap Equity Fund and the Pender Strategic Growth and Income Fund, and Co-Manager of the Pender Value Fund. Prior to joining Pender in July 2013, Mr. Narhi spent over nine years at an independent and value-oriented investment firm in Vancouver. As a Director and Senior Equity Analyst, Mr. Narhi contributed thought leadership and primarily US equity ideas to the company’s Model Portfolio, a concentrated equity portfolio that has outpaced North American benchmarks since its inception in 1994. Mr. Narhi holds a Bachelor of Commerce degree from the University of British Columbia. He earned his Chartered Financial Analyst designation in 2003 and is a member of CFA Vancouver. Mr. Narhi advocates a business-like approach to investing. Sound investing is the process of determining the value underlying a security and then buying it at a considerable discount to that value. The greatest challenge is to maintain the necessary balance between patience, emotional fortitude and discipline to only buy when prices are attractive and to sell when they are dear, while avoiding the short-term “noise” that consumes most market participants.