Baidu Earnings: Robust AI Cloud Growth Offset by Continued Macro Weakness in Advertising

Key Morningstar Metrics for Baidu

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

What We Thought of Baidu’s Earnings

Baidu’s BIDU 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.

Why it matters: The AI cloud business remains a highlight for the firm, and the results support our view that this will be a long-term growth driver and offset more anticipated weakness from advertising.

• AI cloud revenue of CNY 7.1 billion accounted for 26% of overall core revenue in the quarter.
• The slide in advertising revenue is within expectations and reflects overall macroeconomic weakness in China.

The bottom line: We maintain our fair value estimate of $157 per share, as the company’s AI cloud revenue should see continued tailwinds despite muted demand for the advertising business. We believe the shares are undervalued.

• Baidu indicated that AI cloud will continue to see strength in 2025. We tweaked our earnings forecast to reflect double-digit revenue growth here for the year, which should offset advertising headwinds.
• Overall, we continue to expect 2025-26 earnings to remain sluggish before growth picks up in 2027.

Coming up: Baidu did not provide guidance, but management expects advertising revenue to turn positive in the second half of 2025. This suggests more revenue declines in the first half of 2025.

• Baidu will no longer charge users for its AI model Ernie, following the same strategy as competitors. We do not expect this to materially lower our forecasts.
• Baidu is starting to roll out operations for its robotaxi service Apollo Go in Hong Kong. We do not expect this to materially contribute to revenue in the near term, but a successful trial could mean greater monetization.

Big picture: Given DeepSeek’s success, Baidu is moving toward an open-source model for Ernie for other developers to adopt. Baidu believes that eventual success will be based on the adoption of its AI cloud platform, and the company hopes that opening up Ernie can facilitate this.