(Bloomberg) — Baidu Inc.’s revenue fell, reflecting difficulties in transitioning from search ads to artificial intelligence during China’s economic downturn.
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Revenue for the three months through June fell 0.4 percent to 33.9 billion yuan ($4.7 billion), compared with forecasts of 34.1 billion yuan. Net profit was 5.5 billion yuan, compared with 5.06 billion yuan expected. Baidu’s shares fell about 1 percent in premarket trading in New York.
The weak performance highlights the challenge of translating Baidu’s lead in generative AI into meaningful revenue. Baidu’s “Ernie” model for large languages has increasingly driven incremental revenue through ads and cloud services, even as it is locked in an AI price war with companies such as Alibaba Group Holding Ltd. and Tencent Holdings Ltd. It could be years before the Beijing-based company can comfortably reduce its reliance on advertising, one of the biggest casualties of China’s faltering post-Covid recovery.
“Baidu’s business appears to be at a crossroads,” Tian Hou, an analyst at TH Data Capital, wrote in a note ahead of the results. “AI initiatives have not yet delivered the expected results to become BIDU’s growth engine, and China’s economic downturn has further slowed search advertising growth.”
The world’s second-largest economy is grappling with persistent problems ranging from the housing crisis to youth unemployment, hurting business and consumer spending. Earnings at Chinese technology companies have been mixed so far — Tencent, Alibaba and JD.com Inc. all beat earnings estimates, but their results showed continued weakness in areas from payments to e-commerce.
Baidu’s billionaire founder Robin Li has high hopes of creating the Chinese equivalent of ChatGPT, but he faces an uphill battle against other big tech companies as well as emerging startups. Last year, Baidu captured about a fifth of the country’s $250 million generative AI market, IDG estimates.
But this lead is rapidly disappearing. TikTok owner ByteDance Ltd., for example, launched its chatbot Doubao this year, which now regularly surpasses Ernie in terms of popularity.
What Bloomberg Intelligence says
Baidu’s outlook remains very challenging, with its AI businesses set to continue to make losses over the next three years while Tencent and Alibaba continue to narrow the gap. We expect Baidu’s search business – the group’s main cash generator – to face continued pressure from increasing competition in the short video sector, with increasing uncertainty in China’s enterprise sector posing an additional risk. The intensifying AI price war will likely cause Baidu to lose further market share this year, hurting its ability to monetize its technical expertise and turnaround its unprofitable AI businesses. We expect Baidu’s adjusted net profit to decline 5-10% this year.
– Robert Lea and Jasmine Lyu, analysts
The study can be found here.
Baidu’s cloud revenue – now the biggest growth driver – rose 14 percent to 5.1 billion yuan, Li told analysts in a conference call after the results were released. Nearly 9 percent of cloud revenue came from AI products, Li added.
Content produced by Ernie now accounts for 18 percent of Baidu’s search results, up from just 11 percent in mid-May. The move means the company will have to cut advertising space in its search results in the short term, but it’s a sacrifice the company is willing to make to keep users on its generative AI service, Li said.
Overall, Baidu’s broader ambitions in the field of artificial intelligence are gradually paying off – albeit only after years and billions of dollars in investments.
The company has stated that its autonomous ride-hailing arm, Apollo Go, should become profitable on a unit-cost basis by 2025, and it currently operates a growing fleet of robotaxis covering the city of Wuhan.
(Updated with management comments from the post-results conference call in paragraphs 8 and 9)
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