Baidu Earnings: Margin and Ad Revenue Headwinds Expected in the Short Term

Key Morningstar Metrics for Baidu

• Fair Value Estimate: $157.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Baidu’s Earnings

We’ve lowered our fair value estimate for Baidu BIDU by 5% to $157 per ADR from $165 after the firm reported second-quarter revenue of CNY 33.9 billion. This was in line with our estimate, but the company suggested operating margin could be lower in the short term due to the lack of monetization of its ads and weak macroeconomic sentiment. Baidu expects another quarter of decline for its advertising revenue. While this was expected in our forecast of a 3% year-on-year revenue decline in the third quarter, we are also lowering our operating margin assumptions for 2024-25 by 100-200 basis points.

Baidu indicated that advertising softness may hit the margin as well, given the operating leverage, but we think this is also mainly due to the rollout of generative AI ads that the company has yet to monetize. While more search results are incorporating generative AI ads, Baidu is prioritizing client experience to demonstrate the long-term added value they bring over traditional ads, and this has yet to begin monetization. We are uncertain when that will happen, but the company indicated that a significant percentage (18%) of search results now incorporate some type of generative AI.

Nevertheless, visibility on recovery is limited this year, as macroeconomic concerns continue to mount. Automobile, real estate, and franchising remain the weakest sectors for ad demand. Despite short-term headwinds, we still believe Baidu has a dominant market share in the search engine industry and a first-mover advantage with its generative AI model. Although the stock languished in 2024, we believe there is still an attractive long-term upside to the current share price. Still, we’ll monitor macroeconomic developments and potential looming competitive threats to its AI model.