Baidu Earnings: Advertising Weakness Offset by Continued Growth In Cloud Business

Key Morningstar Metrics for Baidu

• Fair Value Estimate: $174.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Baidu’s Earnings

We’ve maintained our fair value estimate for Baidu BIDU at $174 per share after it posted first-quarter revenue of CNY 31.1 billion, in line with our estimate. Core advertising revenue increased only 3% year on year, underscoring continued weakness in China’s macroeconomy. Advertising headwinds were offset by 12% year-on-year growth for the cloud artificial intelligence business, which should remain a bright spot for the company, as year-on-year revenue should continue to rise in the mid-teens next quarter.

Baidu is highly confident that its generative AI model will be a long-term earnings driver, as it is seeing demand from the application side. Clients are now diversified beyond the industrial and infrastructure sectors, and there is greater demand from domestic internet platforms throughout various industries. Baidu said generative AI revenue was about CNY 1 billion this quarter, CNY 322 million of which came from AI cloud.

We expect advertising headwinds to persist into the second and third quarter of 2024, and we forecast about 1% year-on-year revenue growth each quarter and 2% growth for the full year. Management said it doesn’t yet know when it will recover toward its historical mid-single-digit growth. Weakness is driven by macroeconomic conditions and the lack of commercialization for Ernie-enhanced search results.

Baidu hasn’t yet begun to commercialize AI-generated search results (which now make up 11% of total search results) on a consumer level. In addition, advertising demand from small and midsize enterprises remains muted and hasn’t fully recovered since the post-pandemic reopening, according to Baidu. Real estate, franchising, and automobile industries are the laggards, causing advertising malaise. Despite advertising weakness, we still view Baidu positively, given its dominance in search-based advertising and its first-mover core expertise advantage in generative AI, which should be a long-term differentiator.