(TipRanks.com) – Baidu (BIDU) may be best known as China’s answer to Alphabet’s Google (GOOGL), but that’s not why investors have been buying it hand-over-fist since January. Shares may have pulled back a bit in recent days, yet the stock is still up over 30% so far this year, and remains overheated at current prices.
So, what is driving this excitement? The company recently announced its entry into the electric vehicle (EV) market, which may be heating up in China.
Baidu seems to have a fair shot at striking success in this space, but whether this justifies the stock’s recent price performance remains to be seen. Investors seem to be valuing BIDU stock at a premium, purely based on the EV announcement.
Current valuations might not be as frothy as Tesla (TSLA), but they are still elevated, nonetheless. This is where-in the issue lies. With EV stocks trending lower, BIDU may soon be heading in the wrong direction as well.
Why Investors Remain Extremely Bullish On BIDU
Baidu is often referred to as the “Google of China”, with its main business being its internet search engine. But just like Google in the U.S., the tech giant has diversified into high growth areas such as artificial intelligence (AI) and cloud computing.
The EV catalyst is however what has turned investors extremely bullish on the stock. Baidu will be entering this market via a partnership deal with Chinese automotive company Zhejiang Geely, and as part of the agreement, will provide its Apollo autonomous driving technology, while Geely will contribute its automotive manufacturing expertise.
Will this give the early stage venture an edge against not just Tesla, but against homegrown competitors like Nio (NIO) too? Only time will tell.
It will be years before this venture starts to produce tangible results, yet that hasn’t stopped investors from pricing this potential into BIDU.
It is unlikely that this catalyst alone will manage to move the needle further, in fact, as EV stocks start to slide, BIDU may be set to start heading lower too.
Plenty Of Downside Risk As EV Stocks Trend Lower
In the long-term, EVs stand to fully replace fossil-fuel powered cars and trucks, but that doesn’t guarantee that EV stocks will continue to perform well over the near-term.
The “bubble” that has sent many stocks in this sector to unsustainable valuations may be starting to burst. I wouldn’t expect the main stocks in this sector to give back all of their 2020/2021 gains, but a further move lower may be on the cards.
What Does That Mean For BIDU?
Given that investors bid the stock up almost entirely on its EV catalysts, it could give up much of its recently acquired gains. In other words, shares could head from current levels (around $283 per share), back to the $200-$250 per share range that we saw at the start of the year.
What Analysts Are Saying About BIDU
According to TipRanks, consensus among Wall Street analysts for BIDU is a Strong Buy based on 17 analyst ratings. Of the 17 analysts, 13 rate it a Buy, 4 recommend a Hold, while none suggest a Sell.
As for price targets, the average analyst price target of $341 per share implies upside potential of around 20% from today’s prices. Price targets range from a low of $210 per share to a high of $407 per share. (See Baidu stock analysis)
Bottom Line: As EV Stocks Pull Back, So Could BIDU
With EV stocks now trending lower, the electric vehicle catalyst alone might not be enough to fuel additional moves higher. This could mean a big pullback for BIDU in the near-term. If shares fall from today’s prices, back to the top of their prior trading range ($250 per share), we could possibly see double-digit percentage declines in the coming months.
That’s not to say that Baidu’s partnership with Geely won’t eventually prove to be a success. But with the EV catalyst already heavily priced into its shares, it may be tough for BIDU to sustain current price levels.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.