Goldman Sachs is bullish on BIDU-SWR: It is the future AI traffic entrance and the stock price can rise another 31%!

Goldman Sachs believes that Baidu can still rise and has included it in its list of strong buy recommendations.

On July 16th, Goldman Sachs reiterated its buy rating on Baidu in its latest research report and included Baidu in its Regional Conviction Buy list. The target price for the next 12 months has been adjusted from $183 to $197, and the target price for the Hong Kong stock has been raised from HK$179 to HK$193.

Goldman Sachs analyst Lincoln Kong believes that Baidu is one of the most powerful companies in the generative AI field among Chinese internet companies and will become a major traffic entrance for future AI applications:

"We expect that in the future, a few companies may dominate the general-purpose large language models in China and become the main traffic entrances, while internet giants will be in a favorable position.

Internet giants have already become pioneers in large language models, such as Baidu's Wenxin Yiyu and Alibaba Cloud's Tongyi Qianwen.

The main advantage of internet giants lies in the traffic sources on their ToC end, integrating large language models into the natural scenarios of their applications and expanding user scenarios to chatbots/personal assistants."

Baidu's moat in the development of DuerOS

Goldman Sachs believes that they continue to be optimistic about Baidu's future profitability and expect its valuation to expand:

"We expect Baidu's long-term investment in AI over the years to help further increase its revenue and expand its profitability."

Goldman Sachs believes that as a leader in the AI field in China, Baidu has invested in large language models for many years (Baidu was the first company in China to launch a ToC chatbot, and the birth of the Wenxin large model can be traced back to March 2019). It is expected to benefit from the development of generative AI in the long term and its AI products continue to evolve, possessing unique advantages in the four-layer technology stack.

The emergence of large models has changed the entire technology stack architecture of the IT industry. Before the era of artificial intelligence, the IT technology stack usually consisted of three layers: the chip layer, the operating system layer, and the application layer. After the advent of the artificial intelligence era, the technology stack has become a four-layer architecture: the chip layer, the framework layer, the model layer, and the application layer.

Since 2010, Baidu has been comprehensively deploying artificial intelligence and is one of the few global AI companies that have achieved full-stack layout.

As AI continues to develop, data, algorithms, and computing power are considered the three cornerstones. Goldman Sachs believes that for Chinese internet companies, computing power is the bottleneck that restricts the development of large models. However, it also creates opportunities for internet cloud operators to enhance their position in the cloud market. Baidu, with its advantage in GPU inventory, will benefit from this.

With its computing power and end-to-end optimization of the four-layer IT architecture, Baidu has built a core moat in the development of large models.

Goldman Sachs pointed out that according to data from the China Academy of Information and Communications Technology, the scale of China's cloud computing market is expected to reach 380 billion yuan by 2023. The market will "witness" the monetization potential of Baidu's AI cloud services (such as providing API tokens, access to basic models, or application tools) and the monetization potential in consumer usage scenarios, such as search:

The company has begun to explore the possibility of embedding large models in different advertisements. Advertising revenue will also benefit further from the development of intelligent cloud.

According to Baidu's Q1 2023 financial report, the revenue of Intelligent Cloud increased by 8% in the first quarter, achieving profitability for the first time in 8 years, and becoming one of the key factors driving Baidu's overall profit growth. In addition, in March, with the release of Wenyin Yiyu, Baidu's Intelligent Cloud sales leads increased by over 400% compared to the same period last year. These are also expected to translate into revenue growth for Baidu's Intelligent Cloud in the coming quarters.

Similarly, Morgan Stanley upgraded Baidu's rating to "buy" and raised the target price to $190, an increase of $30, stating that with the help of artificial intelligence, Baidu will rise another 31%.

Gary Yu, an analyst at Morgan Stanley, pointed out that Baidu will benefit the most as AI tools help China's $7.4 trillion consumer market transition from offline to online:

Baidu is the "most obvious beneficiary" of the increase in AI applications in China. The company has deep expertise in areas such as autonomous driving and generative AI models, as well as proprietary search data.

The market has not yet recognized the AI innovation of Chinese internet platforms. The demand for Baidu's Wenyin Yiyu has been strong, with over 200,000 people registered for the tool. It is expected that Baidu will be one of the first companies to obtain a commercial license for AI-generated content.

In overnight trading, Baidu's stock rose 0.3% to $149.66, still 31.6% below Goldman Sachs' target price of $197. Baidu's US stock has risen by about 30% so far this year.