Chatbot frenzy drives Baidu’s stock rally to extreme levels

Baidu's Ernie system, which is a large-scale machine learning model would be at the heart of its new bot (Image Courtesy: Reuters)

The heat is on Baidu Inc. to deliver after the hype surrounding its soon-to-come ChatGPT-style service supercharged a rally in its stock.

The stock has jumped 45% in Hong Kong this year, including a 15% gain Tuesday after China’s largest search engine said it will unveil its artificial intelligence chatbot in March. The move, potentially the nation’s most prominent entry into the next big thing, has pushed Baidu shares into overbought territory, with gains trouncing rivals Alibaba Group Holding Ltd. and Tencent Holdings Ltd.

The Wall Street craze sparked by OpenAI’s ChatGPT tool gives a taste of what may come if Baidu manages to convince investors and users of its new service — or vice versa. Nvidia Corp., touted as a preferred pick for the AI cohort, remains near the top of the S&P 500’s performance ranking. Meanwhile, smaller stocks like BuzzFeed Inc. that rode on the theme have seen their rallies flop in a matter of days.

It’s difficult to assess “how much valuation should be quantified” from Baidu’s so-called Ernie Bot at this stage, said Kai Wang, a senior equity analyst at Morningstar. Nevertheless, the rollout “should strengthen its competitive moat from other search engines and could potentially enhance the attractiveness of advertising on the platform,” Wang said.

This year’s searing gains have pushed Baidu’s Hong Kong-listed shares to just 1.1% below the consensus target price for the next 12 months, suggesting little room to gain unless its AI progress brings a fundamental revaluation.

A key technical indicator also shows the rally may be overdone. Baidu’s relative strength index has breached the overbought threshold of 70, while readings for Alibaba and Tencent remain well below that level. Tuesday’s rally for Baidu ADRs added roughly $5.1 billion in market value, more than a basket of ten stocks tied to AI have added all year amid triple-digit rallies, according to data compiled by Bloomberg.

Baidu has spent billions of dollars researching AI in a years-long effort to transition from online marketing to deeper technology, and plans to initially embed Ernie into its main search services. The tool will allow users to get conversation-style search results.

“The market hasn’t attributed much value to Baidu’s AI capabilities, and excitement around its new chatbot could help to raise investor awareness,” said Vey-Sern Ling, managing director at Union Bancaire Privee, while noting generative AI is unlikely to translate into real earnings in the near term.

Ad Recovery

Even before the AI frenzy, analysts had been optimistic about the firm’s ad revenue prospects.

Analysts at JPMorgan Chase & Co. and Macquarie Capital Ltd. anticipate a 2023 recovery in ad revenue and margins after a likely lackluster fourth quarter, thanks to China’s reopening and cost-control measures. Baidu is expected to report a fall in fourth-quarter revenue when it publishes earnings in the next few weeks.

“We believe there is more momentum for Baidu Ernie if successfully launched in March, as it adds a secular growth driver to the shares,” said Esme Pau, head of China/HK internet and digital assets at Macquarie. She nudged up her price target on Baidu shares in January.

However, “we have yet to incorporate its financial impact until the company’s update in March for feature, application and product roadmap launch,” she said.