Baidu Earnings: Continued Advertising Weakness Overshadows AI Cloud Strength

Key Morningstar Metrics for Baidu

• Fair Value Estimate: $146
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Baidu’s Earnings

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

Why it matters: Overall revenue was better than our flat growth estimates due to a 42% revenue year-on-year increase in AI cloud. However, online marketing revenue was worse than our expectations and offset cloud strength as it fell 6% year on year.

Operating margin also contracted by 350 basis points year on year due to the falling ad revenue and should see more pressure as we expect ad revenue to decline 10% year-on-year next quarter and remain soft until 2026.

Given ad softness, we lower our five-year revenue compound annual growth rate assumption to 3% from 3.5% and operating margin by 300 basis points on average per year.

The bottom line: We lower our fair value estimates to $146 (HKD 143) from $157 (HKD 154) for wide-moat Baidu and believe it remains undervalued as it is not fully reflecting a recovery in the ad business. We believe the current price is an attractive entry point, particularly given its positive AI scale potential.

The market responded negatively to the soft guidance, falling 4% after initially gaining 3% in premarket trading. Given the reversal, we believe that ad performance will still dictate how investors view the stock near-term, despite continued robust growth and taking market share in AI cloud.

However, we expect the AI cloud business to be a long-term driver for Baidu and for revenue to grow 20%-25% year on year for next quarter, which should offset weakness in ads. Generative AI revenue increased by “triple digits” year on year this quarter.

Big picture: Management indicated that ad headwinds are transitory and related to macro weakness. While we agree with management, Baidu keeps pushing back its recovery timeline, leading us to believe that Baidu may be losing out on ads versus other internet platforms, which have seen growth.