Baidu Earnings: Ad revenue hit by weak macro conditions as expected

Morningstar Key Values ​​for Baidu

What we thought about Baidu’s earnings

We maintain our $157 per share fair value estimate for Baidu BIDU after third-quarter revenue of CNY33.6 billion was in line with expectations, but down 3% year-on-year. Baidu Core advertising revenue fell 5% year-on-year due to continued macroeconomic weakness in China, with lower ad demand reported across all sectors — real estate, franchise and healthcare were the weakest. Cloud AI revenue rose 11% year over year, as expected, but was slower than the mid-teens growth in previous quarters. We estimate generative AI revenue at CNY 540 million, up 20% sequentially and accounting for 11% of cloud AI revenue. Despite the revenue decline, Baidu Core’s adjusted operating margin (excluding equity-based expenses) was 310 basis points better than expected, offsetting weak advertising results.

Baidu provided partial guidance for the fourth quarter. Management expects Baidu Core’s advertising revenue to further decline by a high figure due to continued macroeconomic weakness, and indicated that the firm has no visibility for its turnaround. With this in mind, our concerns grow, but Baidu has offset its advertising weakness by implementing cost controls, stabilizing adjusted operating margins at 21%-22% in the weak macro environment in 2024. We believe macro conditions are dictating the stock’s weak performance Baidu, but our investment thesis remains intact and we believe it is likely to dominate market share in the Chinese search engine industry in the long term. We believe advertising revenue and demand recovery are likely to correspond with a potential macroeconomic recovery in China in 2025-2026.

Cloud AI revenue growth was driven by mid-market spending in marketing and software. Baidu indicated that it saw annual operating margin expansion in cloud AI, meaning the firm sees operating leverage for the business and potential margin expansion next year.