Robin Li, chairman and CEO of Baidu, spoke at the opening ceremony of the 2021 World Artificial Intelligence Conference in Shanghai in July 2021.
Wu Jun/VCG via Getty Images
Chinese search giant Baidu Inc.'s core advertising business shrank in the second quarter, but analysts say the trend could continue for the rest of the year as China's economic recovery is sluggish and the company struggles to monetize its artificial intelligence technology.
Shares in the dual-listed company fell as much as 7% in Hong Kong on Friday after dropping 4.4% overnight on Nasdaq. Investors were reacting to Baidu's performance for the three months to June. Its main online marketing business, which accounts for more than half of total sales, fell 2% year-on-year to 19.2 billion yuan ($2.64 billion).
The contraction was partially offset by a 10% year-over-year increase in its cloud business, albeit a relatively small contribution. Baidu has also faced weakness in its iQIYI video streaming division.
Overall sales remained flat at 33.9 billion yuan, while net profit increased 5% year-on-year to 5.5 billion yuan.
Stan Chao, a Shanghai-based analyst at research firm Blue Lotus Capital Advisors, said he doesn't have a bright outlook for Baidu in the second half, citing factors including slowing growth in China and growing competition for ad dollars from short-video sites such as TikTok's Chinese sister app, Douyin.
The challenges were confirmed by Baidu Chief Executive Robin Li, whose fortune, Forbes estimates, is now worth $5.2 billion, mostly from his stock holdings in the company. On an analyst call on Thursday, Li highlighted “particular weakness” in ad spending across categories from autos to real estate. He also said advertisers are shifting to social media platforms as users spend more time on them, increasing competition.
“On the macro side, the slow recovery in consumer spending has led many advertisers, especially small and medium-sized advertisers that rely heavily on offline activity, to adopt a very cautious approach to their ad spending,” Lee said.
Meanwhile, the company has yet to figure out how to make more money from AI. On a conference call with analysts, Li said Baidu's AI-generated technology now generates about 18% of search results, up from 11% in May. But as the Ernie large-scale language model, first released in March 2023, helps edit the information, the space where ads are displayed is actually shrinking. That's because users tend to read a few paragraphs of AI-generated answers instead of scrolling through web pages to see and click on ads that are placed all over the place, Chao said.
“The company is still exploring,” he said, “how to increase traffic from AI without limiting monetization opportunities. This process may take a long time.”
Jefferies analyst Thomas Chong wrote in a research note on Thursday that Baidu's AI experiments could cause a 4% drop in ad revenue in the next quarter compared to the same period last year, but Chong also sees strong potential for monetization as the company potentially overhauls its advertising system.
Baidu, meanwhile, is making progress with its ride-hailing unit, Apollo Go, which operates fully self-driving robot taxis in the city of Wuhan, which provided 899,000 rides in the second quarter, up 26% from the same period last year. The company has previously said it expects Apollo Go to be profitable next year.
