Baidu’s Profit Halves After AI Spending Erodes Bottom Line

(Bloomberg) — Baidu Inc.’s profit plunged a worse-than-anticipated 48%, underscoring the growing costs of training and developing AI to fend off challengers in the burgeoning arena.

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The company reported a December-quarter net income of 2.6 billion yuan ($361 million) that missed projections, though much of that stemmed from a loss from equity accounting for preferred shares. It overshadowed a 6% rise in revenue after Baidu’s ChatGPT-style service began to augment advertising sales, helping the Chinese AI leader weather a severe economic downturn. Its shares slid more than 3% in pre-market trading in New York.

Baidu’s results follow disappointing numbers from Alibaba Group Holding Ltd., underscoring how the private sector that once drove the world’s No. 2 economy has run out of steam. The mixed performance underscored the challenges facing a company that once routinely chalked up double-digit percentage growth but is now grappling with macro and market uncertainty.

To rekindle the business, Baidu has joined Silicon Valley peers from Microsoft Corp. to Google in seeking ways to monetize generative AI. The Chinese company has attracted more than 100 million users to its ChatGPT-style service — now including a premium tier that charges a monthly subscription — giving it a headstart against peers like Tencent Holdings Ltd. and ByteDance Ltd.

But revenue generated by the AI model, known as Ernie, is a drop in the bucket for Baidu, which still relies mainly on search ads. Research and development costs climbed 11% last quarter, reflecting fees for servers to support generative AI development.

Billionaire founder Robin Li has warned against China’s so-called “war of a hundred models,” where big tech firms and venture investors alike pour billions of dollars into startups building AI platforms from scratch — many of them leveraging the same open-source code. Baidu is instead pitching local developers to create AI-native applications atop Ernie, including by doling out $140 million to fund such projects.

If successful, Ernie could put Baidu at the core of an AI ecosystem similar to what the GPT Store is to OpenAI. But its long-time rivals Tencent and Alibaba are also vying for what’s likely a winner-takes-all market, as both firms command bigger warchests and user pools thanks to super-apps like WeChat and Taobao.

What Bloomberg Intelligence Says

Consensus expects Baidu’s earnings growth to slow to just 4.6% in 2024, in spite of a bigger contribution from the ERNIE Bot generative-AI tool, as rising promotional and investment costs in the AI business hurt margins. We expect Baidu’s AI ventures to remain loss-making this year, with rising caution in China’s corporate sector a risk to profit in the core search business.

Click here for the research.

Near term, Baidu still counts on advertising sales as its bread and butter — and that doesn’t bode well during a downturn. The world’s No. 2 economy is grappling with a property slump and deflation, forcing Chinese leaders to resort to wide-ranging policies including rate cuts and direct fund injections to boost investor confidence.

Revenue from Baidu’s core businesses including online marketing and the cloud met analysts’ expectations during the December quarter. Its streaming offshoot IQiyi Inc. barely grew its topline after losing some paid subscribers, but profitability continued to improve.

Once the runaway leader in desktop search, Baidu has over the years tried to adapt its business to the mobile era, albeit with mixed success. In January, the Beijing-based company walked away from a $3.6 billion deal to acquire Joyy Inc.’s streaming service YY, citing the lack of regulatory approval.

Its shares have dropped roughly 30% since July in Hong Kong, underperforming peers as the high costs of AI development compound investor concerns over the weak economy.

Read More: Alibaba’s New CEO Elevates AI to Top Priority in Revamp

–With assistance from Debby Wu.

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