Amid regulatory restrictions in China on various sectors, including technology, companies are forced to reduce investments in non-core areas. As a result, China-based internet search giant Baidu, Inc. (NASDAQ: BIDU) is in talks to sell off its controlling stake in iQIYI, Inc. (IQ) for approximately $7 billion, according to Reuters. The official terms of the deal have not yet been made public.
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Following the report, shares of Baidu were trending lower by 3.94% in pre-market trading at last glance, while iQIYI fell more than 5%.
Why the Stake Sale?
If the deal is consummated, it will allow Baidu to focus on its capital-intensive artificial intelligence and autonomous driving units, which are expected to be long-term revenue generators. Markedly, in recent years, Baidu has expanded its reach beyond internet search to include electric cars, cloud services, robotaxis, and autonomous driving.
According to the source, Baidu holds a 53% stake in iQIYI and has over 90% shareholder voting rights in the Chinese video streaming service firm. Interestingly, with a market capitalization of $3.93 billion, iQIYI is ranked second in the Chinese video streaming market.
Baidu did not immediately respond or comment, while iQIYI stated in a statement, “This is purely market rumour.”
Analysts’ Recommendation
Recently, Susquehanna analyst Shyam Patil maintained a Buy rating and a price target of $200 (38.1% upside potential) on the stock.
Though Patil remains cautious about the prevailing macroeconomic environment and the pandemic in China, he is positive about the company’s long-term prospects.
The analyst also stated that while Baidu’s AI companies are showing significant growth, its advertising division is now suffering the most from short-term headwinds.
The rest of the Street is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 11 Buys and four Holds. The average Baidu price target of $209.93 implies 44.96% upside potential. Shares have gained 3.32% over the past six months.
Hedge Funds
TipRanks’ Hedge Fund Trading Activity tool shows that confidence in Baidu is currently Very Positive, as the cumulative change in holdings across all 18 hedge funds that were active in the last quarter was an increase of 882,100 shares.
Concluding Remarks
Companies are striving for growth in this uncertain market scenario. As a result, focusing on core operations is likely to result in long-term gains. Additionally, high analyst ratings and hedge fund optimism seem to support Baidu’s moves.
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