Text | Market capitalization list, author | Jia Lele, editor| Zhao Yuan
In 2021, the survival of companies such as the extinction of education and training groups, game supervision, and travel and catering under the influence of the epidemic is difficult, and the advertising industry is struggling. On March 1, 2022, Baidu, which is regarded by some investors as an advertising company, released its 2021 annual report, and its overall revenue rose by 16.3%.
From betting heavily on AI, to building cars in the field, to AI sign language anchors at the Winter Olympics, Baidu's second growth curve has become more and more concrete.
01 The elephant turns around, how effective is it?
Throughout 2021, Baidu achieved revenue of 124.5 billion yuan, an increase of 16.27% year-on-year.
The result of the capital market is that in the US stock market, Baidu rose 6.84% after releasing its annual report, and the Hong Kong stock market jumped higher and closed up nearly 7%.
Investors voted in favor of Baidu because of two signals in the earnings report.
First, the change in revenue structure represents another step forward in Baidu's business turn.
In 2021, Baidu's core revenue was 95.2 billion yuan, an increase of 21% year-on-year. Among them, advertising business revenue was 74 billion yuan, an increase of 12% year-on-year, and non-advertising revenue was 21.2 billion yuan, an increase of 71% year-on-year, mainly driven by cloud and other AI-driven businesses.
Let's start with the advertising business. In 2021, the extinction of education and training, the comprehensive supervision of games, the contraction of travel, catering and other industries affected by the epidemic, the advertising industry has been significantly impacted, and Baidu can maintain the basic disk without shrinking, which is already very optimistic data.
Let's look at Baidu Intelligent Cloud, which is a piece of business that has sprinted up.
In 2021, the revenue of intelligent cloud was 15.1 billion yuan, an increase of 64% year-on-year, which is an important engine driving revenue growth. Commercialization in manufacturing, energy, transportation and more than doubled revenue in 2021.
According to the "2021H1 China AI Cloud Service Market Research Report" released by IDC, Baidu Intelligent Cloud has been the first in the AI public cloud service market for five consecutive times.
The third business includes intelligent driving and other businesses, intelligent driving is Apollo, and other businesses include small-scale speakers, chips, etc.
Intelligent driving is a business that Has attracted much attention from Baidu, and in 2021, great progress has also been made in commercialization.
According to the annual report, the order volume of unmanned vehicles supplied by Radish Run in the fourth quarter of 2021 was 213,000, an increase of nearly double that of the previous quarter. In contrast, Google's Waymo quarterly orders are in the range of 20,000-40,000 orders.
The second signal is increased R&D efforts.
In 2021, the R&D expenses of Baidu's core business were 22.143 billion yuan, an increase of 31.4% year-on-year, accounting for 23% of core revenue, and the upward trend of this proportion has continued for many years.
The AI layout itself requires huge capital investment in the early stage, such as Amazon Cloud and Alibaba Cloud, which have endured decades of losses in exchange for the hope of profitability.
The input and output of artificial intelligence is not linear, nor is it a harvest of one point of hard work. Before a critical point, it is very hard work, a harvest, and after this critical point, there will be exponential growth, this principle of accelerated circulation, also known as Kurzweil's law.
The best time to plant a tree was ten years ago. As early as 2010, Baidu began to invest in the ai field and continued to invest huge amounts.
The proportion of R&D investment continues to reach a new high, which also stems from Baidu's determination of AI.
Overall, from the changes in the revenue structure of Baidu's financial report, it can be seen that the advertising business belongs to a stable basic disk, and the intelligent cloud and automatic driving that increase investment in research and development are the future.
For such a future business, growth is more important than profitability, and the acceleration of the commercialization process to bring rapid revenue growth is the underlying logic of Baidu's stock price.
02 Why bet on AI?
It's been 40 years since China was on the fast track of the economy, and now we're at a critical juncture.
Standing at this turning point, looking back, the driving force for the development of China's economy is the demographic dividend, the land dividend, in the final analysis, factor-driven and model-driven, we have undertaken a large number of low-end manufacturing industries with cheap labor and land resources, and driven economic growth with investment and exports.
It is also a microcosm of the initial stages of many countries. Judging from the experience of other countries in the past, it is easy to fall into the "middle-income trap" of driving economic development with natural resources or population endowments.
The concept of the "middle-income trap" is derived from the World Bank's 2007 report, East Asian Renaissance: Perspectives on Economic Growth.
The report found that many countries, such as Mexico, Brazil and Argentina, and the Philippines in Southeast Asia, leveraged the comparative advantage of cheap labor to develop basic manufacturing, ultimately achieving a leap from low-income to middle-income countries.
After that, however, they are unable to further scale their economies or innovate technologically, nor can they compete with the products and services of high-income economies. As a result, most countries have experienced economic stagnation after reaching the middle-income level, with income levels hovering.
This tipping point is $10,000 to $12,000 in GDP per capita. In 2021, China's GDP per capita will be $12,551.
Standing at this turning point, it can be seen that if it were not for the impact of the epidemic, the low-end manufacturing industry chain is accelerating its transfer to countries with lower labor costs; the growth of the mobile Internet has peaked, which has brought serious internal involvement of platforms such as e-commerce and short videos; model innovation alone has been unable to create high social value, such as shared charging treasures and fresh e-commerce.
Looking ahead, the way to avoid falling into the middle-income trap is innovation, and it is scientific and technological innovation that drives the upgrading of the industrial structure, of course, it also needs to have supporting institutional innovation.
Throughout human history, every qualitative leap in productivity has been accompanied by technological innovation. The mechanical substitution of manual labor in the first industrial revolution, the electrification of the second industrial revolution, and the informatization of the third industrial revolution are all the same.
It is widely believed that we are now in the midst of the Fourth Industrial Revolution, the Photonic Age. People in the investment circle believe that the next three decades will be the golden age of hard technology, including optoelectronic chips, artificial intelligence, aerospace, new materials, new energy, intelligent manufacturing and so on.
Under this trend, technology companies show two trends:
First, it becomes more and more "hard".
Second, no longer regard speed as the only pursuit.
In the past business model, e-commerce, social networking, games, scale are the biggest barriers, this stage of play is only fast and unbreakable. And when companies enter the hard technology track, they completely transform the logic.
Chips, semiconductors, new energy, aerospace, etc. all have high capital investment, long return cycle, and uncertainty, making it more difficult to build barriers.
This also puts forward higher requirements for enterprises: they must have confident judgment of future trends, be patient enough, avoid strategic swings, and withstand the incomprehension of the outside world.
What are the trends in the Fourth Industrial Revolution? Intelligence must be the biggest feature.
Intelligence requires AI with neural networks and deep learning capabilities as the underlying technology. Artificial intelligence technology can widely empower all walks of life, intelligent security, intelligent logistics, intelligent medical care, etc., improve efficiency, is the key driving force for future economic growth.
PwC proposes that artificial intelligence will significantly enhance the global economy, and by 2030, artificial intelligence will contribute 14% to the global GDP growth, contributing $15.7 trillion to the world economy. Accenture predicts that artificial intelligence will boost labor productivity by 27 percent and increase the total value-added of the economy by $7.1 trillion by 2035.
AI technology creates value by solving problems in specific scenarios or improving accuracy and efficiency, and must also become "smarter" through massive amounts of data.
From technology to scene landing, from landing to commercial success, there is a certain distance. The four AI tigers all have technology, but they are all on the road to commercialization.
03 Is Baidu undervalued?
In the process of transforming technical value into commercial value, Baidu's first stop is intelligent driving, and then to a large extent, it is the coordination of vehicles and roads and the intelligent transportation of the city.
The development of Radish Run is the test of Baidu's automatic driving technology and model innovation in the market.
First, let's look at autonomous driving technology.
The first nature of autonomous driving technology is safety. Complex road conditions and extreme weather determine that if there is not enough data, it is not enough to verify its intelligence and maturity.
After long-term testing in Changsha, Cangzhou, Beijing and other places, radish fast running has collected a lot of road condition data, and the total mileage of the test has exceeded 21 million kilometers.
Second, looking at commercialization, in addition to the doubling of the orders mentioned above, the replicability of radish fast running is emerging.
Up to now, Baidu's Radish Run has covered 8 cities such as Beijing, Shanghai, Guangzhou, and Shenzhen, and officially started commercial operations for fees in three cities.
At the same time, large-scale commercial operations can find problems from real scenes, force technical iteration, and form a positive cycle.
From the perspective of autonomous driving, which is worth trillions of dollars, Baidu's three first-mover advantages are on the surface: the accumulation of technology is deep enough, the ecosystem is large enough, and the unmanned vehicle service is laid out in advance.
Baidu, which stands at a new starting point, has not been treated differently by the capital market, and it is time to re-evaluate this "entrepreneurial" company that has been established for more than 20 years.
From a valuation perspective with profits at its core. With the rise of labor prices (drivers) and the decline in costs brought about by large-scale production, the cost advantage of unmanned shared vehicles will be highlighted, and there will be obvious improvements in the profit side.
JPMorgan Chase's expectation is that the radish run business will reach an inflection point in 2022 and become profitable in 2025. Therefore, in the short term, intelligent driving will become the second growth curve, and AI is a sea of stars in the medium and long term.
If the SOTP valuation method is used, that is, the partial valuation and aggregation method, the advertising-related business is still valued in PE, while the AI-related business can use the price-to-sales ratio.
From the perspective of ESG, the green carbon economy and AI release the impetus for industrial structure upgrading, which are the embodiment of social responsibility.
The valuation system that attaches importance to short-term profits has made it difficult to reflect Baidu's long-term value, and the misalignment between them is exactly what investors should care about.
Resources:
[1] "The next 30 years, definitely the golden age of hard technology", Zhenghe Island decision-making reference;
[2] "Profound Changes Brought by the Fourth Industrial Revolution to the World", People's Forum Network;
[3] The Internet Age of Singularity, Minsheng Securities;
[4] White Paper on Artificial Intelligence Governance, Chinese Academy of Information and Communications Technology;
[5] "China's Economic Growth Creates a World Miracle in the 40 Years of Reform and Opening Up", Lin Yifu