Baidu’s AI Momentum Thrives, But Search Lags Behind

Summary

Baidu’s primary search operations are encountering significant structural obstacles, including flat monthly active user numbers and a consistent drop in average revenue per user. Amid these difficulties in its established business, the company is aggressively pursuing artificial intelligence projects to fuel long-term expansion. Notably, its AI infrastructure developments and practical applications are building considerable traction in the market. A substantial portion of Baidu’s recent superior stock performance can be credited to advancements in its AI chip technology, particularly the Kunlunxin chip design, which is currently advancing toward an initial public offering alongside competitors boasting elevated market valuations. Nevertheless, even as growth accelerates in areas beyond traditional search functionalities, these emerging segments fail to deliver comparable levels of profitability, posing a persistent challenge to overall financial health.

Thesis

In my assessment, Baidu, Inc. (BIDU) merits a hold recommendation at this juncture. Beginning in the second half of 2025, the company’s shares have experienced a remarkable rally, propelled largely by the compelling storyline surrounding the reshoring of AI hardware production within China. Other domestic fabless chip designers, such as Cambricon and Moore Threads, have similarly posted impressive gains, supported by robust investor enthusiasm for semiconductor innovations tailored to AI workloads.

Baidu’s longstanding dominance in the Chinese search engine landscape, often likened to Google in its home market, has been steadily eroded by intensifying competition and evolving user behaviors. Platforms like Tencent’s WeChat and ByteDance’s Douyin have captured substantial portions of user attention through integrated search features embedded within their vast social and short-video ecosystems. Consequently, Baidu’s monthly active users have plateaued, while advertisers increasingly favor these more engaging channels, driving down Baidu’s average revenue per user metrics year over year.

To counteract these pressures, Baidu has pivoted decisively toward artificial intelligence as its cornerstone for future prosperity. The company’s investments span both foundational AI infrastructure and end-user applications, positioning it as a frontrunner in China’s burgeoning AI sector. Key highlights include the rapid scaling of its Ernie Bot large language model, which now rivals global counterparts in capabilities, and the expansion of its cloud computing services optimized for AI training and inference tasks.

A pivotal element of this strategy revolves around Baidu’s proprietary Kunlunxin AI chip series. These chips are engineered specifically for high-performance computing demands in deep learning scenarios, reducing dependency on foreign semiconductor suppliers amid geopolitical tensions. The impending IPO of the Kunlunxin business unit underscores its strategic value and has contributed significantly to Baidu’s stock momentum, mirroring the premium valuations commanded by peers in the AI chip design space.

Beyond hardware, Baidu’s AI Cloud division is witnessing accelerated adoption across industries such as autonomous driving, smart manufacturing, and healthcare diagnostics. Partnerships with major enterprises and government initiatives further bolster this growth trajectory. For instance, Apollo Go, Baidu’s robotaxi service, has expanded operations in multiple cities, leveraging advanced AI for perception and decision-making, which promises recurring revenue streams as commercialization advances.

Despite these promising developments, profitability remains a sticking point. The core search business, while stable, generates the lion’s share of margins due to its mature infrastructure and lower capital intensity. In contrast, AI ventures demand hefty upfront investments in research, data centers, and talent acquisition, resulting in elevated operating expenses that compress overall profitability. Management has guided for continued heavy spending in the near term to secure market leadership, which tempers expectations for near-term earnings recovery.

Looking ahead, Baidu’s fortunes hinge on successfully monetizing its AI portfolio while stabilizing the search segment through product enhancements like AI-augmented search experiences. Regulatory tailwinds in China favoring domestic tech champions could also provide an uplift. However, execution risks abound, including intensifying rivalry from Alibaba and Tencent, as well as potential setbacks in chip production scaling.

Valuation-wise, BIDU trades at a discount to historical averages and peers, reflecting market skepticism over search headwinds. Yet, the AI narrative introduces upside potential if growth catalysts materialize as projected. Investors should monitor upcoming earnings for updates on AI Cloud revenue acceleration and Kunlunxin progress, balancing these against margin trajectories. For now, a hold stance captures the blend of opportunity and uncertainty inherent in Baidu’s transformation journey.