Chinese search giant Baidu’s core advertising business shrank in the second quarter, a trend that analysts say may continue for the rest of this year amid China’s sluggish economic recovery and the company’s struggle to monetize its own artificial intelligence technologies.
Shares of the dual-listed firm plunged as much as 7% in Hong Kong on Friday after falling 4.4% on the Nasdaq overnight. Investors were reacting to Baidu’s results for the three months that ended in June. Its bread-and-butter online marketing business, which typically accounts for more than half of total sales, decreased 2% year-on-year to 19.2 billion yuan ($2.64 billion).
The contraction was partially offset by a 10% year-on-year growth in its cloud business, a relatively smaller contributor. Baidu is facing weakness in its iQIYI video streaming arm as well.
Overall sales were flattish at 33.9 billion yuan, although net income grew 5% to 5.5 billion yuan from the same period a year ago.
Stan Zhao, a Shanghai-based analyst at research firm Blue Lotus Capital Advisors, says he doesn’t have a positive outlook for Baidu in the second half. He points to factors including China’s slowing growth momentum and stepped up competition for advertising spending from short video sites such as Douyin, TikTok’s sister app in China.
The challenges were confirmed by Baidu Chief Executive Robin Li, who now has a wealth of $5.2 billion largely based on a company stake, according to Forbes estimates. During a Thursday analyst call, the billionaire highlighted “particularly weak” advertising spending from sectors ranging from automobiles to real estate. He also talked about fierce competition, as advertisers shift to social media platforms because users are spending more time on them.
“So on the macro front, the recovery of consumer spending has been sluggish, causing many advertisers, especially the small- and medium-sized advertisers who heavily rely on offline activities, to adopt a very cautious approach to their ad spending,” says Li.
Meantime, the company hasn’t quite figured out how to make more money from AI. During the analyst call, Li said Baidu’s generative AI technologies now produce about 18% of search results, up from 11% in May. Yet as its Ernie large language model, which was first released in March 2023, helps to compile information, places to show ads actually shrink. This is because users now tend to read AI-generated answers that come in a few paragraphs, instead of scrolling through web pages and potentially viewing and clicking on advertisements placed throughout, says Zhao.
“The company is still exploring,” he says. “They are trying to see how to increase traffic from AI, but without limiting monetization opportunities. The process might take a long time.”
The experiment with AI might cause Baidu’s advertising sales to decline by 4% year-on-year in the next quarter, Jefferies analyst Thomas Chong writes in a Thursday research note. But he also thinks the monetization potential is huge as the company might upgrade its ad system entirely.
On another front, Baidu has made progress with its ride-hailing arm, Apollo Go. The unit, which operates fully autonomous robot taxis in the city of Wuhan, provided 899,000 rides in the second quarter, up 26% year-on-year. The company has previously said it expects Apollo Go to become profitable next year.
