B (3:15)

Oh my gosh, Toby, you think the valuation multiples are going to come down? I mean, okay, this business has a market cap of somewhere like US$180 billion. Nearly $60 billion of that is in cash. So it has an enterprise value to EBITDA of less than 10 times while growing its bottom line earnings per share, double digits. I mean, even if the top line is only growing 9%, that's, that's downright cheap. That's too cheap to ignore.

D (3:42)

Now look, it's only cheap with the assumption that you're going to get a rebound on those growth rates. Right. If we are in a permanent growth decline, the market is going to reset to a lower valuation at some point. From a platform and business investment standpoint, this could be a money pit, not a growth opportunity. And the bigger picture, Emily, I think is we don't know what's driving these results. What's the TEMU contribution versus pdd? Who knows? What's the platform gross market value? No idea. Or gross market volume? No idea there. What's the retention rate, the take rate? There's no disclosure with these things. Chinese companies, let's put it this way, they historically do not have the best reputation in terms of keeping all the numbers on the up and up. Right. And a refusal to share details on these things doesn't give me a lot of confidence in what's really going on here.

B (4:27)

Yeah, I think that's fair. I never get the full color that I want from Chinese companies and can feel a little criminal about the fact that they don't even give reportable segments. When it comes down to what sales come from TEMU versus the pendul duo marketplace. We disagree, but still I think the valuation is considerable for for maybe more risk tolerant investors.

C (4:48)

Friends, this is this is what makes a market right here. Love the foolish disagreement. Up next, we're figuring out if Baidu's autonomous car business can help drive it self drive it to a successful future. Stick with us.

A (5:01)

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C (6:13)

Welcome back to Motley Fool Money. Chinese stocks can be a non starter for many investors, especially if you're talking about Chinese small caps. But Baidu Ticker Bidu is one of very few exceptions for those that still want to invest in China, but with less risk. It's been described as the Alphabet of China. Baidu has made a name for itself in search advertising and its quote unquote other offerings like self driving but but similar to its American counterparts, Baidu has been under fire for fears that AI could upend its search and related advertising businesses. Toby, did Baidu's latest results give any clues about how it's navigating those concerns?

D (6:52)

They did not, Jason. At least not in my opinion, other than reinforce the belief that Baidu isn't doing it very well. Revenue is Falling a little bit. That's kind of problematic for a supposedly dominant platform in their market. And Baidu has not done a great job of diversifying its revenue sources. Really very ad dependent still. And that core ad business is shrinking. That's in contrast to some of the US tech giants who have had similar issues right when AI first burst on the scene. But their ad revenue is growing for the most part. Cloud AI revenue for Baidu is not yet large enough to offset the decline they're seeing. And that's a problem worsening overall margins are under serious pressure because the parts of the business that are growing that they're investing in are lower margin, meaning they got to grow faster, offset the bottom line impact, toss on concerns about the overall macro economy in China. And Baidu is just not that compelling to me. Now you might say, look, hey, the thesis here is AI growth, right? I get that maybe, but management is telling us don't expect serious returns there anytime soon. Right? So we've got a declining core business, a low margin growth business, and an uncertain future of, of what I could, if it does become a meaningful growth driver here, what it could be and how profitable it's going to be at scale. For me, the upside here is just not justifying the risk. I see.

B (8:17)

Okay, I, Toby's right. You can, you can't.

C (8:22)

Hey guys, thanks for listening to. We'll see you tomorrow.

B (8:26)

Yeah, unfortunately you can't fight with the headline numbers here, which is. Toby is right. The ad market in China right now is, it's bad across the board. And Baidu in particular, its dominance in search especially, it's having the Alphabet problem, which is, it's still there, but they're losing ground, they're losing market share and revenue is falling. And its core business is ad placements. And that's just been incredibly weak for this company. But I do think we are starting to see some return on investment for these initiatives. And while that hasn't made up for that core business falling, I think we're starting to see what the scale could be if Baidu does eventually get there. And in addition, addition to their search business, of course, they're also a leading cloud infrastructure provider in China. So you can think a little bit like AWS here in the United States. And their subscription based AI solutions grew 128% year over year. Now these are solutions that were and are really expensive for Baidu to build out initially, but it seems like that scale is starting to come. So it's possible that a lot of the expenses, a lot of the costs that we saw Baidu experience over the last couple of years are going to be largely behind us now as Baidu looks to be slightly more profitable future. And while management hasn't necessarily guided for that yet, I do think that they can eventually move in that direction.

C (9:42)

So the counter you're saying is that what we're seeing is lower margins in that growth business should start to improve as scale ramps up.

B (9:50)

It's possible. And I hesitate only because we haven't heard management come out and outright say that. Whereas I think if we saw that going to happen over the course of say 2026, management would be very clear in terms of the guidance that they expect to come in. And to Toby's point, a lot of the commentary we're getting from management are just around their initiative. All of these other different pies that Baidu's fingers are stuck in right now and we don't see the actual tangible outcomes coming out from these initiatives yet. But I think it's entirely possible that over the course of say the next five years, over the course of say the next 10 years, that all it takes is one of these pies debate particularly well to more than make up for the core search business. Even at that core search business does continue to decline. And I actually think that the area that this could be that doesn't get nearly enough investor attention is self driving solutions. And you know, we talk about, about Tesla and others, they get all the headlines about like robo taxis, but oh my gosh, Baidu has self driving robo taxis already in operation in 22 cities across the world in many locations. This is 100% fully driverless, actual commercial services being used by the Chinese public on a daily basis. This is not in a controlled environment. This is not something that is that is otherwise being heavily scrutinized or regulated. This is just a part of everyday life. And I think the fact that Baidu and the opportunity that being a leader in robo taxis has gives a lot of home country bias because American investors just don't see that the way we see it with Waymo or Tesla.

D (11:21)

Yeah, my big concern here is you're right, there is potential. But big picture, if you have to be a lot more optimistic than management is being to make a reasonable bull case, I feel like that's a sign there are probably better opportunities elsewhere for your investment capital.

B (11:38)

What can I say Toby? I'm an optimist at heart.

C (11:41)

Gotta love it. All right, thanks guys. Coming up next, we're quick firing on two smaller Chinese Stocks still trying to find their place in the world and after quite a long time for at least one of them. We've got Weibo and Iqiyi next right after this quick break.

E (11:55)

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C (13:06)

As we wrap up today's show, let's discuss two lesser known Chinese stocks, Weibo and iQiyi. Weibo ticker WB is a bit of a washed up Chinese blog site. That's a great bull pitch right there. Right? It's most commonly in the US compared to Twitter or X. And Iqiyi is a video streaming platform with a business model that's kind of similar to Netflix, only it struggled to retain growth. So not very much like Netflix. Now, both businesses are comparative failures when stacked up next to Baidu and PDD Holdings. Toby, when you look at either of these two companies, does one stand out as redeemable to you or do you think both are uninvestable?

D (13:47)

Honestly, Jason, I'd stay away from both of them. Once upon a time, I actually had a very small investment in Iqiyi, but I gave up on that when it was clear that this was going nowhere. Look, Baidu already owns 45% of that business, so if you really, really want to invest in it, you could just do it that way. As it turns out, it's been terrible for Baidu too. It's been dragging them down at a time where they really don't need Any other drags in their business. As we've already discussed here, Iqiyi is losing money on an operating basis. I've got no expectations that changes anytime soon, honestly.

C (14:19)

All right, Emily, so I've got a side with Tobi a little bit here. He hinted at it, but there's some math that screams caution at me about Iqiyi. It spent more money paying interest last year than it earned in operating income. That's tough to dig your way out of that. So what's the bull case? That it can see its way forward in a way where investors actually make money?

B (14:41)

I hesitate again to say that yes, you're right again. These are right at face value. And I certainly have my work cut out to me to make a bull case for either of these businesses. But I love to play devil's advocate. And to your point, Jason, two sides do make a market. They're a lot cut than Baidu or pdd. But I try to see the forest through the trees. In the case of Iqiyi, the financial risk of the debt and the lack of profits are basically non existent. For exactly the reason Toby mentioned. They're fully backed by the cash generating giant that is Baidu. Baidu won't, in my opinion, really let this company fail. And Iqiyi does have some really valuable properties. Unlike other apps, there isn't a clear competitor to Iqiyi and Chinese streaming. So I could draw comparisons between them and Netflix in the past. Right. Getting up to speed in original content and scale in a country with billions of people. It's hard, it's expensive. Maybe they just need more time here. And I think the risk of bankruptcy, given their financial profile is still low with such smart backing.

C (15:34)

Okay, let's move on to Weibo. Toby, based on your comments, I assume you think investors should pause here and move on too, right?

D (15:41)

Yeah, yeah. That's been my trend for. For this year, I think. Yeah, right. Look, honestly, I think there are better options elsewhere. Look at Waibuy. Ad revenue is declining. That seems to be a trend with Chinese companies generally right now. It makes you wonder about the short term state of that region's economy, quite frankly. But there's nothing really unique with this business, Jason. There's no compelling reason for consumers to stay on the platform. Users are heading to other platforms in droves here and honestly, I think investors would be well served to do the same.

C (16:10)

Emily, I hate to do it again, but taking Tobi's side, this is a smaller, less profitable business than it was seven years ago. Yet another bad quarter Is there anything.

B (16:21)

Redeemable I compare Weibull to like maybe even a business like ebay where yeah, you can make the argument does this company really need to exist? But there's probably still a lot of leverage that management can do with what is otherwise a very profitable, very cash generating asset. They are losing out on ad dollars to competition like Rednote, of course, and the platform is declining in popularity, but management team seems aware and kind of okay with that. They still have hundreds of millions of monthly active users and they monetize decently well. They have OPER operating margins north of 27% in the most recent quarter. So much cash that they're actually doubling their operating income just based off the interest income they're generating off of their cash sitting there in their bank accounts. So on a price to earnings basis, the business is trading at a pe ratio of 5 times. So quite literally price like the company is going to disappear in the next decade. Is that possible? Yes, of course it's possible. I think this does not pass David Gardner's snap test. I think if you snap your fingers, it's entirely possible he can replace Weibull with a medley collection of other social media platforms platforms, but with oodles of cash flow, hundreds of millions of dollars of super low capex and reinvestment expenses. I think if they can just figure out how to better monetize users that exist on their platform, this could be an underappreciated opportunity.

C (17:33)

All right, this has been a lot of fun. Toby, Emily, thank you both so much for having this fun conversation. Emily, I'm gonna go and hand you the keys back and you can drive us home.

A (17:42)

Yes.

B (17:42)

Jason, thank you so much for coming in and playing host and allowing me to, you know, I guess entertain you both with four Chinese companies that reported earnings this morning. Yes, but also our that I think are sometimes going underappreciated or missed by opportunities. Jason, thank you for playing host. And Toby, thank you for playing the bear to my bull for these opportunities and listeners, thank you all so much for joining Motley Fool Money today. As always, people on the program may have interest in the stocks they talk about and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored by content and are provided for informational purposes only. To see our full advertising disclosure, please check out our show notes for Jason Hall, Toby Bordelon and the entire Motley Fool Money team. I'm Emily Flippin. We'll see you tomorrow.