Baidu's Big AI Bet: Soaring Profits, Fading Ads

Baidu, Inc. (NASDAQ: BIDU), the Chinese internet giant, reported its fiscal fourth-quarter earnings on Tuesday, February 18, 2025, with a mixed bag of results. While the company's AI Cloud business grew by 26% during the quarter, driving an 18% increase in non-online marketing revenue, its online marketing revenue declined by 7%. The company's adjusted earnings per ADS of $2.63 beat analyst estimates by $0.78, but revenue hit $4.67 billion, slightly ahead of expectations by $70 million, though it dipped 2% from a year earlier.

Baidu's AI Cloud business has been a significant driver of growth for the company, with its full-stack AI capabilities gaining broad market recognition. The company's CEO, Robin Li, stated that 2024 marked a pivotal year in the company's transformation from an internet-centric to an AI-first business. However, the company's advertising business, which provides the majority of Baidu's sales, posted another slow quarter, with online marketing revenue declining by 7%.

Baidu's adjusted EBITDA margin declined by 600 bps to 20%, and its Core adjusted EBITDA margin decreased by 600 bps to 24%. The company's SG&A expenses were $915 million, up 14% year over year, primarily due to an increase in expected credit losses, channel spending, and promotional marketing expenses. R&D expenses declined 12% year over year to $756 million.

Baidu's stock price slid after the report, trading lower by 2.29% at $95.25 premarket at the last check Tuesday. The company's AI investments are expected to deliver more significant results in 2025, with Baidu planning to launch Ernie 5.0 in late 2025 and offer Ernie Bot free to all users. Baidu is also a key Apple Inc. (NASDAQ: AAPL) partner as the latter aims to add AI features to its iPhones for China.

Baidu's AI strategy aligns with its long-term financial projections by focusing on growth areas such as AI Cloud and AI-driven services. However, the company faces potential risks from intense competition in the AI space and the need to differentiate its AI offerings. Baidu's partnership with Apple presents an opportunity for the company to expand its reach and generate additional revenue streams, but the success of this partnership will depend on various factors.

In conclusion, Baidu's AI Cloud business has been a significant driver of growth for the company, but its advertising business has struggled. The company's AI strategy aligns with its long-term financial projections, but it faces potential risks from intense competition and the need to differentiate its AI offerings. Baidu's partnership with Apple presents an opportunity for the company to expand its reach and generate additional revenue streams, but the success of this partnership will depend on various factors.