Baidu Shares Appear Very Undervalued Amid Sustainable Margin Expansion; Maintain FVE at USD 183

We maintain our fair value estimate for Baidu at USD 183 after the firm reported better-than-expected revenue of CNY 32.5 billion, which was 3% greater than our estimates, but was offset by a deceleration of artificial intelligence cloud revenue and sluggish progress in the autonomous driving business. Despite mixed results, we remain bullish on Baidu given the firm's non-GAAP operating margin expanded by 3% to 21.5% compared with our estimate of 17%. While management was noncommittal about whether margins are maintainable in future, Baidu's non-GAAP operating margins were 20%-23% in 2017-18 prior to allocating greater resources to build out its cloud and autonomous driving businesses, which are margin-dilutive. Margin expansion was due to staff cuts, lower channel and promotional spending, and allocation of the budget to higher-margin businesses—none of which appear to be on a one-time basis, which leads us to believe operating margin increases are maintainable in 2023 and beyond.