Baidu’s $11B slump exposes AI reality check

Investors are now questioning whether Baidu’s fast-growing AI business can offset its struggling advertising business after the company’s shares dropped by almost 20%.

According to reports, Baidu’s investment in AI has yet to bring in steady revenue, and analysts say both revenue and earnings will fall from a year ago. 

Baidu relies on ads, but ads are falling, and AI cannot replace them

Baidu faces immense pressure because its ad business is failing slowly. The company funds daily operations, supports new projects, and pays for expensive AI search using revenue from search-based and feed-based ads, but the profit margins are shrinking too fast.

Baidu Core online marketing revenue fell 18% from 2024 to RMB 15.3 billion, while the total company revenue dropped 7% year over year to RMB 31.2 billion. Similarly, profits are shrinking faster than sales, as earnings per share dropped 56.75%, and overall revenue growth is negative 2.7%.

The gap between income from ads and AI revenue is becoming more apparent with each quarterly report, so management must balance the money flowing in with the future it hopes to build with AI.

Meanwhile, customers are adopting the tech firm’s AI tools and services, as AI Cloud revenue rose 21% in 2024 and now stands at RMB 6.2 billion. Similarly, AI-native marketing services generated RMB 2.8 billion in revenue, surging 262% year over year, while AI applications added another RMB 2.6 billion in revenue.

On top of that, Apollo Go delivered more than 3 million fully driverless rides in the quarter, a 212% increase from the year before. However, AI cannot yet offset the sharp drop in advertising revenue because the ad unit alone generated RMB 15.3 billion in the quarter, even after the decline.

Due to asset impairments totaling RMB 16.2 billion, Baidu reported an operating loss of RMB 15.1 billion. At the same time, operating cash flow turned negative over the trailing twelve months, and free cash flow also fell to RMB -15.7 billion.

The company’s stock price still reflects future growth that has not yet appeared in the numbers, as the stock trades at a price-to-earnings ratio of 43.8, but Baidu now shows shrinking revenue, falling earnings, and weaker cash generation.

Therefore, Baidu will remain caught between a fading ad business and an AI future that isn’t ready to carry the weight of the company’s ambitions.

Investors lose confidence in Baidu’s AI profit outlook

Investors have lost confidence in Baidu and are selling their shares after the company lost about $11 billion in market value following a nearly 20% decline in its stock. For example, HHLR Advisors sold 1,641,000 shares worth about $216 million (5.3% of the fund’s assets under management), which added further pressure on the company and reinforced doubts about near-term growth.

While other investors move towards pure AI companies such as MiniMax and Zhipu for more direct exposure to AI expansion, Baidu remains a transition story because it’s tied to advertising revenue. 

Moreover, investors have shown significant uncertainty about Baidu, as traders have increased their demand for downside protection. The company tried to restore trust by announcing its first dividend and a three-year stock buyback plan worth up to $5 billion, but investors weren’t moved.