Baidu’s Sales Stall as It Struggles to Cash in on AI

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(Bloomberg) -- Baidu Inc.’s revenue dipped, reflecting the difficulties of transitioning from search ads to AI during China’s economic downturn.

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Revenue for the three months ended June dropped 0.4% to 33.9 billion yuan ($4.7 billion), compared with projections for 34.1 billion yuan. Net income came to 5.5 billion yuan, versus an estimated 5.06 billion yuan. Baidu’s shares fell about 1% in pre-market trading in New York.

The underperformance shines a spotlight on the challenge of translating Baidu’s lead in generative AI into significant revenue. Baidu’s “Ernie” large language model has increasingly contributed additional sales through ad and cloud services, though it’s embroiled in an AI price war against the likes of Alibaba Group Holding Ltd. and Tencent Holdings Ltd. It could take years before the Beijing-based firm can comfortably cut its reliance on advertising, one of the biggest casualties of China’s faltering post-Covid recovery.

“Baidu’s business seems to be at a crossroads,” TH Data Capital analyst Tian Hou wrote in a note before the results. “Its AI initiatives have not yet delivered the expected results to become BIDU’s growth driver, and China’s economic downturn has further hindered its search advertising growth.”

The world’s second-largest economy is grappling with prolonged issues ranging from a property crisis to youth employment, denting corporate and consumer spending. Chinese tech earnings have been a mixed bag so far — Tencent, Alibaba and JD.com Inc. all beat earnings estimates, but their results illustrated persistent weakness in areas from payment to e-commerce.

Baidu’s billionaire founder, Robin Li, has high hopes of creating China’s equivalent of ChatGPT. But he faces an uphill battle against fellow big-tech firms as well as up-and-coming startups. Last year Baidu took up roughly a fifth of the country’s $250 million generative AI market, IDG estimated.

But that leadership is fast eroding. TikTok-owner ByteDance Ltd., for instance, fired up its Doubao chatbot this year, which now regularly surpasses Ernie in terms of popularity.

What Bloomberg Intelligence Says

Baidu’s outlook remains highly challenged, with its AI ventures set to continue losing money for the next three years as Tencent and Alibaba continue to narrow the gap. We expect Baidu’s search-engine business — the group’s primary cash generating engine — to remain under sustained pressure from rising competition in the short-video sector, with heightened uncertainty in China’s corporate sector an additional risk. The worsening AI price war will likely cause Baidu to lose further market share this year, hampering its ability to monetize its technical expertise and turn around its unprofitable AI ventures. We expect Baidu’s adjusted net income to decline 5-10% this year.

- Robert Lea and Jasmine Lyu , analysts

Click here for the research.

Baidu’s cloud revenue — now its biggest growth driver — jumped 14% to 5.1 billion yuan, Li told analysts in a post-earnings call. Nearly 9% of the cloud sales came from AI products, Li added.

Ernie-produced content, meanwhile, now accounts for 18% of Baidu’s search results, up from just 11% in mid-May. The transition means the company has to cut advertising slots in its search results in the short run but it’s a sacrifice the company is willing to make keep users engaged with its generative AI service, Li said.

Overall, Baidu’s broader ambitions in AI are gradually paying off — albeit after years and billions of dollars of investment.

The company has said its autonomous ride-hailing arm, Apollo Go, should turn profitable on a unit-economics basis by 2025, and it now operates a growing fleet of robotaxis covering the city of Wuhan.

(Updates with management comments from post-earnings call in 8th and 9th paragraphs)

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