Transition from adverts to AI challenges Baidu

Baidu's (9888) first-half net profit edged down 1 percent to 10.94 billion yuan (HK$11.95 billion) as quarterly revenue dipped, reflecting the difficulties of transitioning from search ads to artificial intelligence during China's economic downturn.

Revenue for the three months ended June fell 0.4 percent to 33.9 billion yuan, compared with projections for 34.1 billion yuan and net income came to 5.5 billion yuan, versus an estimated 5.06 billion yuan.

The underperformance shines a spotlight on the challenge of translating Baidu's lead in generative AI into significant revenue. Baidu's "Ernie" large language model has increasingly contributed additional sales through ad and cloud services, though it's embroiled in an AI price war against the likes of Alibaba (9988) and Tencent (0700). It could take years before the Beijing-based firm can comfortably cut its reliance on advertising, one of the biggest casualties of China's faltering post-Covid recovery.

Baidu's online marketing business fell 2 percent to 19.2 billion yuan during the second quarter from a year ago. "Baidu's business seems to be at a crossroads," TH Data Capital analyst Tian Hou wrote in a note before the results. The company's AI initiatives have not yet delivered the expected results to become its growth driver, and China's economic downturn has further hindered its search advertising growth, Hou noted.

Agencies and staff reporter