Baidu, Inc. (NASDAQ: BIDU) had a pretty tough time in 2016. Investments in the online-to-offline (O2O) market failed to gain traction. Chinese regulators cracked down on the company following the death of a 21-year-old college student, who died after receiving an unproven cancer treatment he found advertised on Baidu's search. Later that year, the Chinese government issued revised regulations to address the rise of internet advertising, which hit Baidu particularly hard. In light of these events, investors understandably moved to the sidelines, and Baidu's stock languished.
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The company was forced to overhaul the screening used for advertisers doing business on its website. Though these moves to improve the quality of its advertising and reduce government scrutiny would benefit Baidu over the long term, the company suffered several quarters of year-over-year revenue declines.
The dawn of a new day
Baidu has seen its results improve in each quarter thus far in 2017 and expects that recovery to continue. The company has been shedding its unprofitable segments and focusing on its core competencies of search, mobile, and artificial intelligence (AI).
That strategy appears to be working. In its most recent quarter, Baidu's revenue increased to $3.53 billion, up 29% year over year, which topped consensus estimates and the high end of the company's own forecast. Earnings per diluted share of $3.62 vastly exceeded expectations of $2.19 per share, and operating income grew a whopping 69%, albeit from depressed levels in the prior year.
Driven to succeed
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Following the example set by Alphabet Inc. (NASDAQ: GOOGL) (NASDAQ: GOOG) and Google's Android, Baidu announced this year that it would open-source its autonomous driving technology, and since then, more than 70 companies have joined its Apollo platform. Baidu is widely considered to be the leader in self-driving technology in its native China and has ambitious plans to produce vehicles with Level 3 autonomous features by 2019, and have Level 4 autonomous cars on the roads by 2021. To that end, it recently partnered with Chinese automaker BAIC Group, which will integrate Baidu's self-driving technology into its cars.
Baidu increasingly focused on AI in 2017 and has made it a cornerstone of its technology, calling itself an "AI-enabled business." Baidu has integrated AI into many of its business operations, including improving the accuracy of its search, to better detect traffic patterns for users of its Maps and customize recommendations for its iQiyi streaming service. The company also uses AI to power its virtual assistant and improve the relevance of the items in its news feed. It continued down that path in 2017, which will pay future dividends.
There's also word this year that Baidu is looking to spin off its streaming service iQiyi as early as 2018 in an IPO that could value the platform at between $8 billion and $10 billion. The company is frequently called the Netflix (NASDAQ: NFLX) of China, and Baidu plans to hold a controlling stake in the company following the IPO by issuing dual-class shares.
The Netflix-style service has an estimated 442 million monthly active users and commands 33% of the 25- to 30-year-old demographic that is most sought after by advertisers, making it one of the leading players in streaming video in China. Earlier this year, news broke that iQiyi had reached a licensing deal with Netflix for the latest seasons of Netflix original programs like Black Mirror and Stranger Things. Netflix has shelved plans to enter the streaming market in China anytime soon due to the difficulty posed by regulatory hurdles.
The numbers tell the tale
The year isn't quite over, but Baidu's already had quite a run. Its stock has jumped over 40% so far this year, more than double the gains of the broader market. The company has taken all the necessary steps to turn its business around and return to growth.
After a tough year, Baidu made all the right moves and crushed it in 2017.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares), Baidu, and Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Baidu, and Netflix. The Motley Fool has a disclosure policy.