China’s Baidu (NASDAQ:BIDU) reported its second-quarter results today, missing Wall Street estimates as continued weakness in its advertising business overshadowed growth in artificial intelligence.
Baidu reported second-quarter earnings per share of RMB7.22, missing the analyst estimate of RMB9.84. Meanwhile, revenue came in at RMB31.33 billion, down 4% year-over-year.
Baidu’s traditional mainstay, online marketing revenue, was down 19% to 13.1 billion yuan compared to a year earlier due to cautious advertisers amid a stagnant macroeconomic environment.
Yes, the AI Thesis is Intact
Underneath the advertising decline, the company’s AI-related businesses stood out. Baidu’s AI Cloud Infrastructure revenue rose 50% year-over-year to RMB7.3 billion. GPU Cloud revenue within that segment shot up 283% year-over-year backed by rising demand for public cloud-based AI computing, up from 184% growth in the prior quarter.
AI applications rose 3% to 2.5 billion yuan, while AI marketing services were flat at 2.6 billion yuan. According to Baidu founder and CEO Robin Li Yanhong, the growing momentum in Baidu’s core AI-powered business reaffirms its transition from an internet-centric company to an AI-first company.
Baidu noted that AI-powered businesses continued to account for half of its Baidu General Business revenue, while the company also maintained positive cash flow. The changing revenue mix suggests the company’s transition away from its historical dependence on advertising.
Advertising Remains a Problem
The bear case for Baidu, however, is equally clear. The online marketing services segment was down 19% from a year ago, with a reported total revenue of 13.1 billion yuan. Two factors contributing to this downturn have been weak consumer spending and China’s prolonged property downturn that pressured advertising budgets.
The company is also facing competition from short-form video platforms and AI-powered search alternatives, eroding its core franchise. Baidu may be offsetting some of the revenue impact from advertising through AI, but the company’s AI ambitions also come at a hefty price.
The company has been spending billions into its ERNIE large language model, autonomous driving platform Apollo, and also its AI cloud infrastructure. All of these investments, even though would strengthen Baidu’s long-term AI positioning, have an uncertain ultimate payoff.
Baidu has also been increasingly spending on AI infrastructure and personnel. According to analysts, this is likely to continue pressuring margins even as AI-related revenue grows. Meanwhile, competition remains another concern, with Alibaba and ByteDance coming up with their own AI models and products.
