Is Baidu Stock Finally Changing Before Our Eyes?

The company behind China's leading search engine has been on its own journey of finding answers in recent years. Baidu (NASDAQ: BIDU) has struggled to regain its growth ways. Revenue has declined in three of the last four years.

The rediscovery process has been challenging, largely because its legacy business of search and traditional online advertising has been deteriorating at an alarming pace. With Baidu kicking off the new trading week with fresh financials on Monday morning, it's worth exploring how the first quarter's rather ho-hum results underscore a dramatic passing of the ships in the transformation.

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You can't spell Baidu without AI

Revenue for Baidu's general business rose 2% in the first quarter compared to the prior year, while total revenue fell 1%. It's not the news that normally gets investors excited, but the shares did open nicely higher on Monday. It's a big deal because Baidu stock is beating the market, rising more than 50% over the past year.

Dig deeper beyond the top-line results, and you see passing ships. Baidu's legacy business has experienced a year-over-year decline of 29%. Its ascending artificial intelligence (AI)-fueled results soared 49% over that time, and that figure actually understates the growth of its AI cloud infrastructure business.

Baidu's AI cloud infra segment -- now accounting for a third of the online pioneer's overall business -- soared 79% for the quarter. Its homegrown Kunlunxin AI chip line is expanding its reach, particularly amid China's trade restrictions on U.S. chipmakers. Its Qianfan enterprise model-as-a-service (MaaS) platform is also gaining traction.

Baidu is finally at an inflection point that should turn heads for growth investors, despite this week's flat overall results. Baidu's core AI operations have finally overtaken its problematic legacy business. It's now 52% of the first quarter's general business revenue. Its strength will only continue to be amplified, translating into more material top-line gains. The inverse is true of its once-bread-and-butter search business. AI isn't just moving the needle at Baidu. It is the needle.

The cheapest AI stock you don't know about

Many global consumer tech giants are spending big on AI, and it's weighing on near-term bottom-line results. Baidu is certainly spending money to get its GPU and robotaxi businesses rolling, but it's been able to shave corporate overhead and become more efficient elsewhere to drive home material profitability.

Baidu trades at a forward earnings multiple in the high teens, and just 15 times next year's profit target. It's able to do this financially while still scoring some pretty impressive leadership positions.

• Baidu's Apollo Go remains a leader in autonomous driving tech. Its robotaxi platform has now completed 22 million cumulative rides, peaking at more than 350,000 weekly drives in March. It has already expanded into South Korea and the United Arab Emirates. Testing continues in Europe and Hong Kong. It has become a legit force among self-driving car stocks.
• Its traditional online advertising business may be struggling, but its AI-native marketing revenue has risen 36% over the past year.
• Baidu's AI applications revenue was flat with where it was a year ago, but that's another catalyst waiting to get on the growth bandwagon. The popularity of the AI movement as well as Baidu's ascending stature in the market should start to amplify the potential there.

There will naturally be risks in investing in a fallen hero that is a decade removed from its last sustained periods of double-digit revenue growth. There are also risks with international investing in general, and Chinese stocks in particular. The bullish momentum may not be apparent on the surface, but Baidu is starting to put it all together again. Yes, the market has already started to realize the transformation, given the stock's performance over the past year. It's still cheap, and if it can keep growing without sacrificing margins, it's even cheaper today than investors think.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu. The Motley Fool has a disclosure policy.