Mizuho predicts how much self-driving cars should add to Baidu's share price

Published Wed, Feb 10 202112:52 AM EST

Shares of Chinese technology company Baidu are at an all-time high and could climb further, a managing director at an investment bank said this week. James Lee of Mizuho Securities said the company is well positioned to benefit from the expansion of China's autonomous driving network. The country has ambitious plans to build transportation systems that support self-driving vehicles in 30 domestic markets, Lee told CNBC's "Squawk Box Asia" on Tuesday. The country wants sensors and cameras on the road and in cars to be connected by 5G networks, and will need an operating system to control the devices. That's where Baidu comes into play. "We believe the most efficient way of building a nation-wide smart transportation and [autonomous driving] network is to use a unified [operating system], which could benefit Baidu's Apollo," analysts said in a Mizuho note dated Feb. 8. The tech giant, whose core business is in web search, has the largest number of autonomous driven miles and the "most experienced AI system" at this point, the note said. Mizuho raised the company's price target from $250 to $325 on Monday. The stock was also upgraded by investment bank China Renaissance the following day. Baidu shares rallied 6.67% on Tuesday, hitting an all-time intraday high of $304.24 and closed a little below that level at a record $295.04. Still, Mizuho's price target implies an upside of 10% for the stock. "The reason we increased our target price is that we are lifting … Baidu's autonomous driving business value from $20 billion to $40 billion as the national build out plan becomes clear," Lee said. Potential revenue generators Mizuho said the market for autonomous driving features is estimated to be worth around $77 billion, assuming the technology reaches 20% of China's 270 million passenger cars. Baidu could charge car owners a monthly fee for the use of its technology, the firm argued, predicting that the company could hold 50% market share of monthly subscription revenue. Additionally, if Baidu's operating system becomes the "technology standard," car makers would need to include the system for a "seamless integration" into a city's smart transportation network. "By 2030, we expect Baidu to generate about $11.5 billion of [annual] revenue from autonomous driving," said Lee. Mizuho then applied a revenue multiple of 3.5 to arrive at its $40 billion valuation of Baidu's autonomous driving business. "This is pretty consistent with all the high growth internet segments, as local services and cloud computing," Lee added. Potential challenges Automakers are currently struggling to deal with a global shortage of advanced semiconductors , with some companies pausing production. But Lee said that chip shortage is unlikely to dampen Baidu's longer term prospects in self-driving systems. He explained that the expansion of China's smart transportation network will happen over three to five years. He also said regulatory concerns plaguing Chinese financial tech companies don't apply to the autonomous driving industry for now, despite there being only four "major bidders" — Alibaba, Tencent, Huawei and Baidu — for projects. At this point, the Chinese government wants to highlight its "technology, leadership and innovation" in the sector, Lee explained. "As a result, the focus is to provide policy support, not necessarily policy restrictions," he said. However, Baidu's operating profit margin could fall five percentage points per year for the next two years as it puts money into smart transportation projects. "I think these are very necessary, strategic investments," said Lee. Margins for the company's advertising business are likely to remain unchanged, he said.

Robotaxis on the road in Beijing.

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Shares of Chinese technology company Baidu are at an all-time high and could climb further, a managing director at an investment bank said this week.

James Lee of Mizuho Securities said the company is well positioned to benefit from the expansion of China's autonomous driving network. The country has ambitious plans to build transportation systems that support self-driving vehicles in 30 domestic markets, Lee told CNBC's "Squawk Box Asia" on Tuesday.

The country wants sensors and cameras on the road and in cars to be connected by 5G networks, and will need an operating system to control the devices. That's where Baidu comes into play.