Baidu Earnings: Ad Revenue Hurt by Weak Macro Conditions, as Expected

Key Morningstar Metrics for Baidu

• Fair Value Estimate: $157.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Baidu’s Earnings

We keep our fair value estimate of $157 per share for Baidu BIDU 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 was slower than its mid-teens 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 gave partial fourth-quarter guidance. Management expects Baidu Core advertising revenue to further decline by high single digits due to continued macroeconomic weakness, and they indicated that the firm has no visibility for its recovery. Given this, our concerns are mounting, but Baidu has offset its advertising weakness by implementing cost controls, stabilizing adjusted operating margins at 21%-22% throughout the weak macro environment in 2024. We believe macro conditions are dictating the underperformance of Baidu’s shares, but our investment thesis remains intact, and we believe it is likely to dominate market share in China’s search engine industry in the long term. We think advertising revenue and demand recovery will likely correspond with a potential macroeconomic recovery in China in 2025-26.

AI cloud revenue growth was driven by mid-tier enterprise spending in marketing and software. Baidu indicated that it saw year-on-year operating margin expansion in AI cloud, which implies the firm sees operating leverage for the business and potential margin expansion upside next year.