On Wednesday, JPMorgan (NYSE:JPM) issued a new rating for Baidu.com (NASDAQ:BIDU) Inc (9888:HK) (NASDAQ: BIDU), downgrading the tech giant from Overweight to Neutral and reducing its price target from HK$125.00 to HK$85.00. The decision comes as the firm anticipates challenges for Baidu due to uncertainties in the macroeconomic recovery and potential negative effects on revenue from its generative AI content initiatives.
The analyst from JPMorgan highlighted concerns about Baidu's earnings visibility, citing the uncertain pace of macro recovery and the impact of AI content on monetization as key factors behind the downgrade. A significant adjustment was made to Baidu's adjusted earnings per share (EPS) for 2025, which has been decreased by 21%, positioning it 17% below the Bloomberg consensus.
The revision reflects a 7% reduction in Baidu's core advertising revenue and a subsequent 6 percentage point decrease in the company's core operating profit margin (OPM). Despite these adjustments, JPMorgan predicts that the weakness in Baidu's core advertising revenue will reach its lowest point in the first quarter of 2025, with an expected acceleration in the following quarters. However, the pace of this recovery remains uncertain, and current consensus estimates may be too optimistic.
JPMorgan also took into account Baidu's financial position, noting that the company's net cash, including deposits in commercial banks and wealth management products with maturities over one year, accounts for 84% of its market capitalization. This suggests a 2x ex-cash price-to-earnings (PE) ratio for 2025. With Baidu's history of returning approximately $1 billion annually to shareholders, the firm believes that the downside risk to Baidu's current share price is limited.
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