Introduction to Baidu Inc

Baidu Inc, a prominent Chinese internet and AI company, continues to adapt to challenging economic conditions and evolving market dynamics. Known for its extensive portfolio, which includes algorithmic search, news, voice assistance, online storage, and AI-driven navigation services, the company faces headwinds in its advertising division while seeing promising growth in AI cloud services.

Stock Overview and Recommendations

The company’s stock is currently rated as HOLD, with a revised target price of HK\$80.00, reflecting a -1.9% downside from its current share price of HK\$81.55. This target price has been reduced from a previous high of HK\$90.00 due to a subdued macroeconomic environment and weaker-than-expected advertising performance.

Despite these challenges, Baidu’s strong positioning in AI-related technologies and cloud computing keeps its long-term prospects engaging for investors. The company trades at 7.6x 2025F PE, significantly below its historical mean of 16.4x, suggesting potential undervaluation if its growth trajectory stabilizes.

4Q24 Performance Preview

Baidu’s fourth-quarter results for 2024, set for release on 18 February 2025, are expected to show a year-on-year revenue decline of 4%. This is largely attributed to a weak macroeconomic backdrop. The advertising segment, in particular, is forecasted to experience a high single-digit drop, deepening the decline seen in the previous quarter.

However, the silver lining lies in the AI Cloud segment, which is projected to grow by 15% year-on-year in 4Q24. GenAI now accounts for 11% of Baidu’s cloud revenue, and this momentum is expected to sustain into 2025, driven by advancements in AI adoption and further upgrades to Baidu’s Ernie model.

Advertising Segment Challenges

Baidu’s advertising revenue is under significant pressure, reflecting a combination of macroeconomic challenges and shifting user behaviors. Online ad revenue is projected to decline 9% year-on-year in 4Q24, with Baidu Core’s revenue (excluding iQiyi) expected to drop 7% year-on-year to RMB 26.8 billion.

Notably, 20% of Baidu’s search results now incorporate AI-generated content, but monetization of this feature has been slower than anticipated. The company is actively exploring new commercial formats through AI-driven note-based marketing and short video promotions. These initiatives aim to enhance advertiser ROI through targeted and visually engaging content.

AI Cloud Services and Future Growth

The AI Cloud division continues to outperform, with a projected 9% year-on-year revenue growth in 4Q24 to RMB 6 billion. The division is set for high-teens growth in 2025, fueled by the increasing adoption of Baidu’s large language models and enhanced client penetration. The next-generation Ernie model, scheduled for early 2025, is anticipated to further accelerate growth.

Baidu Wenku, a key driver for the AI Cloud business, has surpassed 90 million monthly active users, ranking second globally after ChatGPT. The platform’s AI-powered features are bolstering user engagement and creating new revenue opportunities.

iQiyi: Subscription Business Under Pressure

Baidu’s subsidiary, iQiyi, continues to face challenges in its subscription business due to intense competition and limited visibility on its content pipeline. The company’s focus on mini-dramas is a defensive strategy, but this approach will require time to yield results.

Despite these issues, iQiyi remains a key component of Baidu’s overall portfolio, contributing to long-form video content revenue.

AI Innovations and Diversification

Baidu is leveraging its AI expertise to diversify its portfolio. Key initiatives include:

• Ernie Bot Application: This consumer-facing app has gained significant traction, with over 10 million monthly active users and cumulative invocation volumes exceeding 3.5 billion.
• Paddle OCR 2.9: A powerful tool for document information extraction, offering a 6% improvement in text layout analysis.
• Xiaodu AI Glasses: The world’s first native AI glasses equipped with a Chinese large language model, unveiled at the Baidu World 2024 Main Forum.

Earnings Revisions and Risks

Baidu’s revenue estimates for 4Q24 and 2025 have been lowered by 8% and 5%, respectively, due to ongoing softness in advertising revenue. Net profit forecasts for the same periods have been reduced by 25% and 11%, translating to a net margin of 20% and 21%.

Potential risks include:

• Weaker-than-expected recovery in the macroeconomic environment
• Fierce competition in the advertising segment
• Shrinking government budgets
• The U.S. ban on the supply of high-end chips to Chinese tech companies

Valuation and Final Recommendation

Baidu’s valuation remains attractive, with the stock trading at 7.6x 2025F PE, far below its historical average of 16.4x. However, given the current macroeconomic challenges and uncertainties, the recommendation remains HOLD, with a target price of HK\$80.00 (US\$89.00). This reflects cautious optimism about Baidu’s ability to navigate short-term headwinds while capitalizing on long-term AI-driven growth opportunities.

Conclusion

Baidu Inc stands at a crossroads as it faces short-term challenges in its advertising business while enjoying promising growth in AI Cloud services. With robust innovations in AI and a diversified portfolio, the company remains a key player in the tech space. Investors are advised to monitor its performance closely as it navigates through a challenging macroeconomic landscape.