Although the recent policy decisions have gripped the market now, the hype around artificial intelligence is far from dying down. According to PwC, productivity gains are expected to contribute $15.7 trillion to the global economy by 2030.
Of that, 45% of total economic gains are projected to come from product enhancements and stimulation of consumer demand. What’s even more interesting is the fact that China is expected to reap the largest economic gains from AI, with a potential 26% boost in its gross domestic product by 2030.
China has emerged as an AI leader alongside the U.S. in spite of the current tariff war. With these counterbalancing forces vying for victory, Beijing-based tech company Baidu, Inc. (NASDAQ:BIDU) faces an uncertain future.
How Baidu Got Started
Although it began as an internet search company, Baidu has been investing in AI since 2010. Nowadays it operates under two segments: Baidu Core, which provides online marketing services alongside some other offerings, and iQIYI, which is an online entertainment video service provider. Baidu prides itself on being one of the few companies that provide a full AI stack comprising four layers.
Baidu’s share price has not been the sought-after stock on Wall Street despite the various AI-based offerings. Over the past year, the stock has lost more than 13%. Although this year it is marginally up, the past month has been brutal and led to a plunge of 10%.
The price multiple now sits at 8.42x its forward non-GAAP earnings, which is quite low compared to what the industry is clocking on average. Its price is sitting at only 1.56x sales.
Can Baidu be a bargain buy when so much downward pressure is being exerted on markets? We examine Baidu a bit more closely.
Baidu’s New AI Models
AI hype properly gripped the market when ChatGPT launched and became a popular generative AI model overnight. This created a surge of companies investing in AI.
However, creating an AI model from scratch comes at a significant cost, which is why it was baffling when Chinese company DeepSeek announced that it had managed to create a free and open-source R1 AI model for less than $6 million. The model outperformed OpenAI’s latest o1 model in many third-party tests.
Baidu was inspired by this open-source approach and announced that the source code of its upcoming generative AI chatbot release will be available publicly. Management’s approach is to open-source its next-generation AI models and offer premium chatbots for free.
It also launched an AI chatbot called Ernie in 2023, but intense competition led to a somewhat subdued response, even after Baidu claimed that its latest Ernie 4 model is at par with Open AI’s GPT-4 capabilities.
Baidu is set to launch the latest Ernie 5 model, a “foundation model” with “multimodal capabilities” that can process texts, videos, images, and audio inputs.
In March, Baidu released two new AI models, the latest version of its foundation model as well as a “reasoning model” called Ernie X1 that the top brass claimed rivaled the likes of DeepSeek’s R1 but at about half the price. While users had to pay for subscriptions to use Baidu’s previous AI models, the latest ones are free to use.
The leadership team is betting on these new AI models to become a serious AI threat in China. The huge shakeup comes primarily from DeepSeek, but there are established Chinese tech companies like Alibaba and ByteDance that have invested in AI chatbots.
As an aside, our own research on the ground in China came back less optimistically on Baidu as a whole. What we were hearing is that Baidu is not popular among the locals because of excessive ad inserts and placements that crowd out the user experience. So much so in fact that one commentator mentioned “Baidu may not make it.”
How Is Baidu Doing Now?
Baidu has last reported Q4 and fiscal year results for 2024. In them, it admitted to facing some near-term pressures but management was clearly optimistic that AI will be a growth catalyst in 2025. The softness in the online marketing business has caused some issues for Baidu.
Baidu’s annual revenue for 2024 declined by 1% year-over-year to $18.24 billion. The Baidu Core segment posted a 1% rise in its top line to $14.35 billion.
Although this is the goliath business division, marginal gains were offset by an 8% drop in the top line of the iQIYI segment to $4 billion.
Baidu’s profitability also took a hit last year with net income on a non-GAAP basis standing at $3.70 billion, or a drop of 6% from the prior year.
As of now, the market is too rife with tension with the news of high tariffs, especially on Chinese products, and China has retaliated with its own set of reciprocal actions. So, while Baidu faces some near-term weaknesses, it might be wise to observe from the sidelines for now to see how the latest AI models fare in a competitive market.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
