Chinese stocks surged, with the Nasdaq Golden Dragon China Index closing up nearly 11% on Thursday, marking its largest intraday gain since March 2022. The offshore yuan also briefly broke the 7-to-1 barrier against the dollar. This was driven by a series of unexpected policy moves from China, leading foreign institutions to reassess their view of Chinese assets. Scott Rubner, Managing Director at Goldman Sachs Global Markets, noted the recent strong performance of Chinese stocks and stated that Chinese equities should be a key component of investors' plans once the U.S. elections conclude.
On Thursday, Baidu (BIDU, Financial) shares soared. At the time of writing, the stock was up 9.09%, trading at $102.56.
Product and Technology – The Driving Force Behind Baidu’s Rise
Baidu announced major updates to its AI and cloud products at the 2024 Baidu AI Cloud Summit in Beijing. The upgrades include the Baige AI Heterogeneous Computing Platform 4.0 and the Qianfan Foundation Model Platform 3.0. According to Dou Shen, Baidu’s EVP, the Ernie AI model now handles more than 700 million daily queries on the Qianfan platform. The company also mentioned that Baige 4.0 achieves over 99.5% training efficiency on a cluster with 10,000 GPUs and can manage clusters of up to 100,000 GPUs.
Baidu’s AI coding assistant, Baidu Comate, introduced new features helping programmers review code and architecture. Comate serves over 10,000 enterprise clients. Additionally, Baidu's AI-driven customer service platform Keyue autonomously resolves 90% of queries, handling 1.5 billion queries in total.
Last week, Alibaba (BABA) also unveiled over 100 open-source AI models at its annual cloud event, Apsara. China's cloud services market is fiercely competitive, with major players like Baidu, Alibaba, ByteDance (BDNCE), Tencent (TCEHY), and iFlytek cutting prices for their large language models (LLM).
Maintaining Stability in a Complex Environment: A Long-term Test for Baidu
Based on its Q2 2024 report, Baidu's revenue estimate for 2024 has been downgraded from $19.35 billion to $19.08 billion. Analysts now project a slight slowdown in 2025 growth due to uncertainties in Baidu’s core online marketing amid a challenging macroeconomic environment. However, analysts remain optimistic about Baidu’s AI Cloud and Apollo Go (self-driving robotaxi) businesses, projecting a 7.5% annual growth rate over five years.
In terms of profit margins, Baidu’s trailing twelve months (TTM) free cash flow (FCF) margin is around 26-27%. Despite increasing profit margins, analysts maintain a 25% FCF margin assumption for a safety buffer in their models.
For Q2 2024, Baidu posted mixed results: revenue of $4.67 billion, slightly below market expectations of $4.74 billion, largely due to a 2% annual decline in core online marketing revenue. The macroeconomic environment has weakened digital advertising demand, affecting Baidu further as it integrates its ERNIE-driven GenAI into core products.
Management reported that 18% of all search queries in Q2 were answered by generative AI, leading to fewer searches and monetization challenges. Despite this, Baidu's leadership aims to transition from a cost-per-sale (CPS) to a cost-per-click (CPC) model for better profitability in the GenAI era.
In addition to its focus on AI Cloud, which grew 14% annually in the last quarter, Baidu seeks to enhance user experience over short-term monetization. Even though Q2 performance was mixed, AI Cloud's acceleration helped maintain slight positive revenue growth. CEO Robin Li emphasized that AI Cloud mitigated the ongoing headwinds in online marketing, contributing to Baidu's core revenue growth.
On the operational front, analysts believe Baidu’s updates to its search platform, although impacting short-term monetization, will drive long-term success. Apollo Go now offers fully autonomous ride-hailing services across Wuhan, with plans for expanded testing of its latest RT6 vehicles.
Baidu's AI innovations are increasingly impactful across various sectors. CFO Rong Luo stressed the importance of AI-native product transformation and operational optimization for sustained profitability.
In Q2, Baidu launched ERNIE 4.0 Turbo, expanding its GenAI model series. Its autonomous ride-hailing service, Apollo Go, reported 899,000 rides, up 26% annually, and began offering 100% fully autonomous operations in Wuhan. Baidu projects its robotaxi business will break even in unit economics in the coming years.
Despite economic challenges, Baidu (BIDU, Financial) remains a strong buy according to analysts, with recent valuations suggesting a fair value estimate of $199 per share. The company’s robust balance sheet, with $37 billion in cash and investments against $10 billion in debt, supports a positive long-term outlook.
