Company Reports

Baidu’s free cash flow dropped by CNY 5 billion sequentially to negative CNY 8 billion, driven by a 92% quarter-on-quarter surge in AI-related capital expenditure. While cash-generative advertising revenue fell 19% year over year, revenue from its capital-intensive AI businesses grew by only 25%.

Baidu’s traditional search business faces significant long-term challenges from fast-growing internet and large language model competitors, including Alibaba, ByteDance, Tencent, and DeepSeek. As a result, Baidu is increasingly shifting its focus toward its AI-powered businesses, which accounted for 35% of total revenue in the fourth quarter of 2025.

In the first quarter, Baidu's non-GAAP EBIT fell 29% year on year due to a decline in the search business but grew 28% sequentially to CNY 3.8 billion thanks to acceleration in the artificial intelligence-powered businesses. Baidu thinks Kunlunxin is on track to list in Hong Kong by August.

Chinese artificial intelligence companies are pivoting from user acquisition to monetization. ByteDance's Doubao has begun testing paid subscription tiers, following AI cloud price hikes by major Chinese hyperscalers. Tencent and AI startup Zhipu also raised model API prices earlier this year.

In the fourth quarter, Baidu's total revenue was down 4% year over year, but improved 5% sequentially. Baidu no longer reports traditional search revenue. Non-GAAP EBIT fell 41%, narrowing from the 69% in the third quarter, and grew 35% sequentially.

Baidu’s traditional search business faces significant long-term challenges from fast-growing internet and large language model competitors, including Alibaba, ByteDance, Tencent, and DeepSeek. As a result, Baidu is increasingly shifting its focus toward its AI-powered businesses, which accounted for 35% of total revenue in the fourth quarter of 2025.

We have transferred coverage of Baidu. Non‑artificial intelligence general business revenue, driven largely by search, fell 20% year over year in the fourth quarter. Online marketing revenue, mostly search‑related, is no longer disclosed.

Baidu's third-quarter 2025 revenue declined 7% year over year as advertising remains weak, but its artificial intelligence cloud continues to be a larger part of the company.

According to third-party reports from The Information in September, Baidu has started producing a 30,000 cluster of its own artificial intelligence chips, Kunlun P800, to potentially replace Nvidia for training and inference of large language models.

Baidu’s online advertising business accounted for 79% of Core revenue in 2024 and will be the main source of revenue in the medium term, given its dominant market share for search engines, but we believe that unless it can develop another industry-leading business, it could face long-term challenges for advertising dollars from growing competitors such as Tencent and ByteDance. Baidu is increasingly shifting its focus toward its cloud business and now also artificial intelligence, with its Ernie generative AI model becoming its flagship product. We believe that Baidu is an early mover and should benefit from China's AI development, but whether Ernie will be the long-term leader will depend on execution, as we believe other resource-heavy companies have the potential to catch up to Baidu if there are missteps in its generative AI development.

Baidu's second-quarter 2025 revenue declined 4% year over year due to continued weakness in advertising, but was offset by its enterprise artificial intelligence cloud and emerging generative AI businesses.

Baidu’s online advertising business accounted for 72% of Core revenue in 2023 and will be the main source of revenue in the medium term given its dominant market share for search engines, but we believe unless it can develop another industry-leading business, it could face long-term challenges for advertising dollars from growing competitors such as Tencent and ByteDance. Baidu is increasingly shifting its focus toward its cloud business and now also artificial intelligence, with its Ernie generative AI model becoming its flagship product. We believe that Baidu is an early mover and should benefit from China's AI development, but whether Ernie will be the long-term leader will depend on execution as we believe other resource-heavy companies have the potential to catch up to Baidu if there are missteps in its generative AI development.

Baidu's first-quarter 2025 revenue increased 3% year on year, driven by strength in its enterprise artificial intelligence cloud business.

Baidu's December-quarter revenue declined 2% year on year to CNY 34.1 billion. AI cloud revenue grew 26% year on year while advertising revenue continued to fall.

Based on DeepSeek’s initial claims about lowering computing costs to less than 5% of ChatGPT's costs while keeping similar performance, we believe this could be a wake-up call for Chinese artificial intelligence firms such as Baidu and not just US-based hyperscalers. While DeepSeek doesn't make Baidu’s AI model Ernie irrelevant—its freely distributed format makes monetization of Baidu’s AI business harder in the personal cloud segment. Our fair value estimate is unchanged at USD 157 (HKD 154). We haven't factored in much growth from the personal AI cloud business and DeepSeek shouldn't affect our valuation.

China’s leaders announced greater measures to loosen monetary policy and for more proactive fiscal policy in its Politburo meeting on Dec. 9. The Hang Seng Index jumped 3% toward the end of the trading day on the announcement. Large-cap ADRs that are indicative of China’s consumer confidence such as Alibaba and Pinduoduo saw their shares increase 7% and 10%, respectively. However, we are still waiting for specific policy details before assessing whether the policies will be effective in lifting consumption and ensuring economic growth doesn’t slow further.

We keep our USD 157 (HKD 154) per share fair value estimates for Baidu after third-quarter revenue of CNY 33.6 billion was in line with expectations, but fell 3% year on year. Baidu Core advertising revenue fell 5% year on year, driven by further macroeconomic weakness in China, with lower ad demand reported from all sectors—real estate, franchising, and healthcare were the weakest. AI cloud revenue grew 11% year on year—as expected—but slower than its midteens growth in previous quarters. We estimate generative artificial intelligence revenue at CNY 540 million, up 20% sequentially and accounting for 11% of AI cloud revenue. Despite revenue decline, Baidu Core adjusted operating margin (excluding share-based expenses) was 310 basis points better than expected, offsetting its weak advertising results.

Baidu’s online advertising business accounted for 72% of Core revenue in 2023 and will be the main source of revenue in the medium term given its dominant market share for search engines, but we believe unless it can develop another industry-leading business, it could face long-term challenges for advertising dollars from growing competitors such as Tencent and ByteDance. Baidu is increasingly shifting its focus toward its cloud business and now also artificial intelligence, with its Ernie generative AI model becoming its flagship product. We believe that Baidu is an early mover and should benefit from China's AI development, but whether Ernie will be the long-term leader will depend on execution as we believe other resource-heavy companies have the potential to catch up to Baidu if there are missteps in its generative AI development.

We lower our fair value estimate by 5% to USD 157 per ADR (HKD 154 per share) from USD 165 (HKD 162) for Baidu after it reported second-quarter 2024 revenue of CNY 33.9 billion, which was in line with our estimate, but suggested that operating margin could be lower in the short term due to the lack of monetization of its ads and weak macroeconomic sentiment. The company expects another quarter of decline for its advertising revenue, and while this was expected in our forecast of a 3% year-on-year revenue decline in third-quarter 2024, we are also lowering our operating margin assumptions by 100-200 basis points in 2024 and 2025. Baidu indicated that advertising softness may hit margin as well given the operating leverage, but we think this is also mainly due to the rollout of its new generative AI ads that the company has yet to monetize. While more search results are incorporating generative artificial intelligence ads, Baidu is prioritizing the client experience for these ads to demonstrate the long-term added value they bring over traditional ads and thus, has yet to begin monetization. We are uncertain when Baidu will begin monetization, but it indicated that a significant percentage, 18% of search results, now incorporate some type of generative AI embedded into it.

We lower our fair value estimate by 5% to USD 165 per ADR (HKD 162 per share) from USD 174 (HKD 171) as we expect macroeconomic weakness in China to persist for the rest of 2024 and likely into 2025. Our valuation downgrade is based on forecast revisions to Baidu’s advertising business (72% of Baidu revenue), and we now 1) assume revenue falls 3%-4% year on year for the second and third quarter of 2024 and 2) lower its outlook to low-single-digit growth in 2025 from midsingle digits. Previously, Baidu said its advertising business could see recovery in the low single digits starting in the second quarter of 2024, but we believe that recovery is no longer imminent and visibility is limited this year as macro concerns continue to mount. Advertising headwinds come from the automobile, real estate, and franchising industries, said Baidu. Management did indicate, however, that e-commerce advertising showed relatively modest performance based on 618 sales. Baidu's advertising revenue growth has historically been at least on par with China’s GDP growth rate, but we now expect it to underperform the benchmark for 2024. As such, we elect to reduce Baidu’s forecast revenue growth to be lower than China’s expected GDP growth of 4%-5%, given the lingering macroeconomic concerns. Despite the greater uncertainty, we believe Baidu’s investment thesis remains intact, based on our view on long-term margin expansion and artificial intelligence core strength, and its shares appear undervalued currently.