Will AI Spending Boost Baidu’s Earnings Prospects?

After rallying to a 4-1/2 month high late last month, Baidu Inc depositary receipts (ADRs) (BIDU) dropped to a 2-1/2 month low today as China’s struggling economic outlook weighs on the stock.  Citigroup, China International Capital, and Daiwa Capital Markets, are among analysts that have cut their earnings estimates for Baidu.  Tuesday’s second-quarter earnings results from Baidu are expected to show a slowdown in adjusted net income growth as the company competes with Alibaba Group Holding (BABA), JD.com (JD), and Tencent Holdings Ltd (TCEHY) for dominance in China’s artificial intelligence (AI) market.

Baidu is seen as the early leader in Chinese AI after developing the country’s first ChatGPT-like service called Ernie BOT.  Baidu has gained +13% so far this year, even as the Hang Seng Tech Index is down more than -3%.  However, disappointments related to its Ernie BOT service and lackluster consumer spending in China have recently weighed on Baidu’s share price.  Morningstar said, “Expectations have been lowered for the second quarter and beyond for Baidu” as the company faces macro headwinds and is likely to see weaker operating margins due to the build-out of its AI products.

Weakness in China’s economy is expected to slow Baidu’s AI revenue growth as the slowing economy has forced local governments to tighten their budgets, leading to delays and reduced capital spending.  Those concerns prompted Citigroup Global Markets Asia to cut their revenue estimates for Baidu as they said, “Given the relatively higher base from last year, together with a recent downward revision to GDP forecasts, we conservatively tweaked down” are revenue forecast for AI and advertising for the third quarter.

With rising competition in the AI space and a slowing Chinese economy, the future earnings outlook for Baidu remains uncertain.  Tencent Holdings said last week that it is developing one of China’s best AI models, and Alibaba Group Holding said it is integrating a ChatGPT-like AI into its meeting and messaging apps.  Also, Union Bancaire Privee noted, “The development of generative AI applications is still at an early stage,” and investors shouldn’t rule out Alibaba Group Holding and Tencent Holdings launching products in this area. 

However, the Chinese government has targeted AI as one of a dozen tech priorities, and after a two-year regulatory crackdown, the government is encouraging investment in AI technology to compete with the U.S. and Europe.  Also, some analysts remain optimistic about Baidu’s earnings prospects. Goldman Sachs said Baidu continues to be the best-positioned Chinese internet firm given its early pivot to AI opportunities, even if they aren’t profitable just yet.  In addition, Union Bancaire Privee said, “Baidu is viewed as being in the lead for generative AI because of its more visible investments over the years.”

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.