Baidu: China's Cheapest Internet Stock? Q2 Ads Decline and AI Growth Doubts

Baidu: A Value Stock or a Value Trap? Analyzing China's AI Gamble

Baidu (BIDU, 9888.HK), once a dominant force in China's internet landscape, is now facing headwinds as it navigates a transition from search-based advertising to artificial intelligence. Despite double-digit growth in its AI-related businesses, the company's Hong Kong-listed shares are currently the cheapest among major Chinese internet players.

Since the beginning of 2025, Baidu's Hong Kong stock has risen by less than 3%, significantly underperforming Alibaba and Tencent, which have surged 40% and 42% respectively. The Hang Seng Tech Index has also outpaced Baidu, gaining 24% during the same period. This lackluster performance reflects investor concerns about Baidu's future growth trajectory.

According to Bloomberg, Baidu is trading at a forward P/E ratio of just 9.7, the lowest among Hang Seng Tech Index constituents. Alibaba trades at 12.8x, and Tencent at 18.1x. This valuation suggests that the market has less confidence in Baidu's ability to generate future earnings compared to its peers.

Q2 2025 Earnings: A Mixed Bag

Baidu's Q2 2025 earnings, released on August 20, revealed a complex picture. Total revenue was down 4% year-over-year, and net profit plunged 35% year-over-year. This decline was largely driven by monetization challenges in its core search business, where advertising revenue fell 15% to RMB 16.2 billion. However, AI-driven new businesses showed promise, growing 34% and surpassing RMB 10 billion in revenue for the first time, showcasing potential diversification.

CEO Robin Li highlighted the company's strengthened AI capabilities and comprehensive end-to-end AI products and solutions, which he believes are driving revenue growth in its AI cloud business. CFO described the business mix as becoming more balanced and diversified. The challenge, however, lies in convincing investors that these AI initiatives can offset the decline in traditional advertising revenue.

The AI Outlook: Uncertainties Remain

While Baidu is investing heavily in AI, the capital markets remain skeptical. The transition from search to AI is proving to be painful, and the long-term prospects for Baidu's AI ventures are still uncertain. Bloomberg noted that Ernie Bot, Baidu's chatbot, has fallen behind competitors from ByteDance and Tencent, as well as open-source models like Alibaba's Qwen, indicating intense competition in the AI space.

Bloomberg analysts have suggested that Baidu's weak quarterly results confirm that significant challenges remain, and AI investments are expected to remain unprofitable for the next three years. This prolonged period of unprofitability is a major concern for investors, who are looking for more immediate returns.

In conclusion, Baidu's current valuation reflects the market's concerns about its ability to successfully transition to an AI-driven business model. While the company is making progress in developing its AI capabilities, it faces intense competition and a long road to profitability. Whether Baidu can overcome these challenges remains to be seen. Investors need to carefully consider the risks and potential rewards before considering this stock.