Why is Michael Burry betting big on Baidu? 💰 Discover the surprising moves in the world of Chinese tech stocks!

Scion Capital, led by Dr. Michael Burry, increased its exposure to Chinese stocks by 54% in Q2 2024, focusing significantly on Baidu. Despite this increase, Baidu’s revenue growth has been sluggish due to factors such as restrictive Chinese government policies, global competition, and poor monetization of its user base. Baidu’s valuation, with a 9.6x forward earnings multiple, appears attractive at first glance, but the company’s slow growth, coupled with global geopolitical tensions and negative investor sentiment toward Chinese stocks, introduces significant risk. Scion Capital’s increased allocation to Baidu, now 12.3% of its portfolio, is noteworthy, especially with Baidu’s Q2 earnings report expected soon. Baidu’s investments in AI and robotaxis could potentially drive future revenue, but the company’s current financials suggest that it may be too early for investors to follow Scion Capital’s lead.

The Challenges Facing Baidu: Sluggish Growth Amid Global and Domestic Headwinds

Baidu, once a shining star in the Chinese technology sector, has seen its growth slow considerably in recent years. Since the latter half of 2021, Baidu’s revenue has remained relatively stagnant, averaging between $4 billion and $4.5 billion per quarter. This marks a significant decline from its pre-pandemic growth trajectory, where the company consistently posted double-digit growth rates.

The slowdown in Baidu’s growth can be attributed to several factors, both domestic and global. On the domestic front, the Chinese government’s stringent policies in 2021, coupled with the fallout from the Evergreen debt crisis, have created substantial macroeconomic headwinds. These challenges have not only impacted Baidu but have also slowed the overall growth of the Chinese economy, particularly in the technology sector.

Globally, the souring sentiment towards Chinese stocks, exacerbated by geopolitical tensions, has further compounded Baidu’s difficulties. The company’s ability to compete on a global scale has been hampered by these factors, leading to a muted growth outlook.

Baidu’s Strategic Pivot: Investing in AI and Emerging Technologies

Despite the challenges, Baidu has continued to invest heavily in emerging technologies, particularly artificial intelligence (AI). The company’s AI Cloud Business, which is housed under its non-online marketing revenue, has shown some promise. In Q1 2024, Baidu reported a 4% year-over-year increase in total sales to RMB 23.8 billion (approximately $3.30 billion). However, this was still lower than the revenue range of $4-4.5 billion observed in previous quarters.

Baidu’s AI Cloud Business, a key area of growth, saw a 6% year-over-year increase in revenue to RMB 6.8 billion (around $935 million). While this is a positive sign, it represents a slowdown from the 11% year-over-year growth recorded in the previous year. This deceleration in growth is concerning, especially when compared to the strong double-digit growth rates posted by global tech leaders in recent quarters.

One of Baidu’s most notable AI initiatives is its Ernie model, which has garnered significant user adoption since its launch in March of the previous year. The model now boasts over 300 million users, underscoring Baidu’s leadership in AI within China. However, questions remain about the company’s ability to monetize this user base effectively, particularly in the face of slow revenue growth and limited profitability.

The Potential of Baidu’s Robotaxi Business: A Glimmer of Hope

In addition to its AI initiatives, Baidu has also been making strides in the autonomous driving sector, particularly with its Apollo Go robotaxi fleet. The Chinese government’s recent announcement of measures supporting the introduction of robotaxis in ride-hailing and car rental fleets is a positive development for Baidu. The company currently operates its Apollo Go robotaxis in several major cities, including Beijing, Wuhan, Chongqing, Shenzhen, and Shanghai.

Some analysts have even projected that Baidu’s robotaxi business could become profitable as early as next year, provided the company continues to scale its operations effectively. This potential profitability could serve as a catalystA stock catalyst is an engine that will drive your stock either up or down. A catalyst could be news of a new contract, SEC filings, earnings and revenue beats, merger and acquisit... More for Baidu’s stock, particularly if it coincides with an inflection in revenue and earnings growth.

The Valuation Debate: Is Baidu a Bargain or a Value Trap?

From a valuation perspective, Baidu appears attractive at first glance. The company’s forward earnings multiple stands at just 9.6x, which is significantly lower than the S&P 500’s 20.2x forward earnings multiple. This disparity might suggest that Baidu is a bargain for value-conscious investors, especially those looking for exposure to the Chinese technology sector.

However, a deeper analysis reveals a more complex picture. Consensus estimates project a 2.9% decline in earnings per shareEarnings per share (EPS) is a fundamental financial metric that provides valuable insights into a company's profitability. This widely used indicator helps investors and analysts g... More (EPS) for Baidu this year, on the back of a modest 2.8% growth in full-year 2024 revenues, which are expected to reach $19.2 billion. When compared to the MSCI China Index, which is currently valued at 9.1x forward earnings, Baidu’s valuation does not seem as compelling.

Moreover, the broader investment sentiment towards Chinese stocks remains pessimistic, with many investors wary of the risks associated with the Chinese market. This sentiment is likely to continue depressing valuation premiums for Chinese stocks, including Baidu, making the company’s 9.6x forward earnings multiple less appealing in context.

The Risks and Uncertainties: Why Investors Should Proceed with Caution

Investing in Chinese stocks, particularly in the technology sector, carries significant risks. Global regulatory authorities and sovereign entities are increasingly passing measures aimed at restricting the export of intellectual property and critical technology to China. These measures, including restrictions on the sale of advanced semiconductor chips, pose a direct threat to Baidu’s growth prospects.

Baidu has acknowledged these headwinds in its Q1 2024 earnings call, noting that its ability to invest in capital expenditures in 2024 will be limited by the unavailability of advanced chips from global partners. This limitation could hinder Baidu’s efforts to scale its AI and autonomous driving initiatives, both of which are critical to the company’s long-term growth strategy.

While Baidu has a $5 billion share buyback program in place, which has helped keep its share count steady, this alone may not be enough to offset the broader risks facing the company. Without a clear inflection in revenue and earnings growth, Baidu’s stock may continue to struggle, and investors could face further downside risk.

Insights:

1. Scion Capital significantly increased its position in Baidu despite the company’s slow growth.
2. Baidu’s current valuation is appealing, but geopolitical and market risks remain high.
3. Baidu’s future hinges on AI and robotaxi investments, with upcoming earnings reports being crucial.

The Essence (80/20):

• Core Topics: Scion Capital’s strategic increase in Chinese stocks, particularly Baidu; Baidu’s sluggish growth due to policy restrictions, global competition, and challenges in monetizing its user base; the potential future impact of Baidu’s AI and robotaxi investments.
• Detailed Description: Scion Capital has allocated a significant portion of its portfolio to Baidu, which faces slow revenue growth and market skepticism despite a seemingly attractive valuation. The hedge fund’s move is speculative, relying on potential future gains from Baidu’s AI and robotaxi initiatives.

The Guerilla Stock Trading Action Plan:

Consider Market Sentiment: Weigh the broader investor sentiment against Chinese stocks before making investment decisions.

Monitor Baidu’s Q2 Earnings: Evaluate the impact of Baidu’s AI and robotaxi investments on its financial performance.

Assess Geopolitical Risks: Keep an eye on global regulatory changes affecting Chinese tech stocks.

Blind Spot 1: Overreliance on AI and Emerging Technologies for Revenue Growth

• Description: Scion Capital’s increased investment in Baidu hinges heavily on the potential of its AI and robotaxi ventures. However, the monetization of these technologies is still uncertain, and their impact on Baidu’s overall revenue growth may be overestimated.
• Remedy: Diversify the investment portfolio to include companies with more stable and proven revenue streams, reducing the risk associated with speculative bets on emerging technologies.

Blind Spot 2: Geopolitical and Regulatory Risks

• Description: The investment in Baidu overlooks the significant geopolitical risks and global regulatory challenges that Chinese tech companies face, including restrictions on technology exports and potential sanctions.
• Remedy: Continuously monitor geopolitical developments and adjust the investment strategy as necessary. Consider hedgingFinancial hedging is a strategy used to reduce or eliminate the risk of financial losses that may arise from unfavorable price movements. More against these risks by investing in non-Chinese tech companies or sectors less affected by global tensions.

Blind Spot 3: Market Sentiment Against Chinese Stocks

Description: The negative investor sentiment towards Chinese stocks, driven by broader economic and political concerns, could continue to depress valuations, limiting the upside of Baidu’s shares even if the company performs well operationally.

Remedy: Focus on timing the investment to capitalize on potential sentiment shifts. Implement a staggered investment approach, gradually increasing exposure as market sentiment improves, rather than committing a large portion of the portfolio upfront.

BIDU Technical Analysis (daily)

This chart for Baidu Inc. (BIDU) shows the stock currently trading around $88.97 after a recent upward move. The price has been in a downtrend since early April, with the 200-day moving average acting as strong resistance around $104.27. The 50-day moving average is also below the 200-day moving average, confirming the overall bearish trend.

Support and Resistance Levels:

• Support: The key support level is around $85.50, which was tested recently and held, indicating buyers stepping in at this level.
• Resistance: The immediate resistance level is near $91.00, where the stock is currently trading. The next significant resistance is at $104.00, aligning with the 200-day moving average.

Volume Analysis: The volume shows a slight increase during the recent price rise, suggesting some buying interest, though it is not significantly above average. This could imply that the upward move may not be very strong.

Relative Strength IndexIn the world of technical analysis, the Relative Strength Index (RSI) stands as a cornerstone tool for traders seeking insights into market momentum. Developed by J. Welles Wilder ... More (RSI): The RSI is currently at 52.52, showing a neutral stance. It is neither overbought nor oversold, suggesting that the stock could move in either direction depending on future price action.

On-Balance VolumeThe On Balance Volume indicator (OBV) is a technical analysis tool used to measure the flow of money into and out of a security over a specified period of time. It is a cumulative ... More (OBV): The OBV has been declining, indicating that the recent price gains might not be supported by strong accumulation, which is bearish.

Stochastic RSIIn the realm of technical analysis, the Stochastic RSI (StochRSI) emerges as a powerful tool for traders seeking to navigate market dynamics with precision. Developed by Tushar S. ... More: The Stochastic RSI is at 1.000, indicating an overbought condition. This suggests that the recent upward move may be due for a pullback or consolidation.

Chaikin OscillatorNamed after its creator Marc Chaikin, the Chaikin Oscillator stands as a formidable tool in the arsenal of technical analysts. This oscillator is designed to measure the accumulati... More: The Chaikin Oscillator is showing a positive reading of 1,273,076, indicating some buying pressure, but it is not particularly strong.

MACDThe MACD indicator is essentially a momentum indicator that shows the relationship between two different moving averages of price. The MACD is the difference between the 12-period ... More (Moving Average Convergence Divergence): The MACD line is slightly above the signal line, and the histogram shows a minor positive value. This indicates a potential but weak bullish crossover, which could signal the beginning of a short-term upward trend.

Time-Frame Signals:

• 3 Months: The stock might see a short-term bounce given the recent upward move and the weak MACD bullish crossover, but the overall trend remains bearish. Expect resistance near $91 and stronger resistance near $104. Consider this a “Hold” if already invested, or “Sell” on rallies near resistance levels.
• 6 Months: Given the prevailing downtrend, the stock is likely to face continued downward pressure unless it can break above the 200-day moving average near $104. Without a clear breakout above this level, consider a “Sell.”
• 12 Months: The longer-term outlook remains bearish unless a significant reversal occurs with the stock breaking above $104 and sustaining higher levels. The overall trend suggests a “Sell” unless there is a clear bullish reversal signal in the future.

Overall, the chart suggests that Baidu Inc. is still in a bearish trend despite the recent short-term bounce. The stock faces significant resistance levels that may cap any further upside, and the indicators do not yet show strong bullish momentum.

BIDU Technical Analysis (weekly)

This weekly chart for Baidu Inc. (BIDU) shows a long-term downtrend, with the stock recently closing at $88.97. The price is well below the Anchored Volume Weighted Average Price (VWAP) from August 1, 2023, at $107.59, indicating that the majority of trading activity in the past year has been at higher levels, and current price action is significantly below this average.

Support and Resistance Levels:

• Support: The nearest support level is around $80.00, a psychological level and a recent low from mid-2024. If this level fails to hold, the next support is around $70.00, which was a previous low back in 2020.
• Resistance: The immediate resistance is at $107.00, aligning with the Anchored VWAP. Further resistance is near $120.00, which was a consolidation level during 2023.

Volume Analysis: The volume has been generally declining over the past few months, with occasional spikes on downward moves, indicating selling pressure. The low volume during recent price declines could suggest that selling may be exhausting, but there is no strong buying interest yet.

On-Balance Volume (OBV): The OBV has been in a downtrend, confirming that the overall selling pressure has been stronger than buying pressure. Although there is a minor uptick recently, it is not significant enough to indicate a trend reversal.

Time-Frame Signals:

• 1 Year: The overall downtrend suggests that the stock is likely to continue facing downward pressure unless it can break above $107.00, which would indicate a potential trend reversal. Current signals suggest a “Sell” or “Hold” if already invested.
• 2 Years: If the stock remains below $107.00 and fails to show any significant upward momentum, it could continue to decline towards the $70.00 support level. Without a breakout above key resistance levels, consider a “Sell.”
• 3 Years: The long-term downtrend and inability to break key resistance levels suggest that the stock may continue to struggle. If no significant reversal occurs, the stock could remain in a prolonged downtrend. Consider a “Sell” in the absence of a clear upward trend.

Overall, the chart indicates that Baidu Inc. is in a long-term bearish trend, with limited signs of a reversal at this stage. The stock is currently trading below major resistance levels, and key indicators point to continued selling pressure. Unless there is a significant breakout above $107.00, the outlook remains bearish.

Past performance is not an indication of future results, and this article should not be considered as investment advice. Always conduct your own research and consider consulting with a financial advisor before making any investment decisions. 🧡

Looking Ahead: A High-Risk, High-Reward Proposition

Dr. Michael Burry’s decision to increase Scion Capital’s exposure to Baidu is a bold move, one that underscores his contrarian investment approach. While Baidu’s valuation appears attractive on the surface, the company faces significant challenges that could limit its upside potential in the near term.

Investors should carefully weigh the risks and uncertainties associated with Baidu before following Scion Capital’s lead. The company’s upcoming Q2 earnings report, scheduled for August 22, 2024, could provide further insight into Baidu’s growth prospects and help clarify whether this investment is a well-timed opportunity or a potential value trap.

For now, Baidu remains a high-risk, high-reward proposition, one that requires a careful and measured approach from investors.