Baidu's Core Ad Business Falters: Can AI Growth Offset Weakness?

Baidu, Inc. BIDU is facing mounting pressure in its core advertising segment. In the second quarter of 2025, online marketing revenues dropped 15% year over year to RMB 16.2 billion, as China’s economic slowdown, a weak property market and tighter corporate ad budgets weighed heavily on demand. Advertising accounts for more than half of the company’s revenues, making this decline a significant concern for its growth trajectory.

Adding to the challenge is Baidu’s structural shift toward AI-powered search. By the end of June, over 50% of mobile search results featured AI-generated content, up from 35% in April, and this rose to 64% in July. While this transformation enhances user experience, it currently lacks clear monetization, widening the revenue gap. Notably, online marketing revenues had already fallen 6% year over year in the first quarter, and the trend worsened in the second quarter as well, dampening investor optimism.

To soften the blow, Baidu is leaning on AI Cloud and non-ad businesses. AI Cloud revenues rose 27% year over year to RMB 6.5 billion, while non-online marketing revenues jumped 34% to RMB 10 billion, supported by strong adoption of the company’s Ernie AI model and enterprise AI solutions. However, these segments remain relatively small compared to the ad business and cannot yet fully offset its weakness, though they helped mitigate near-term pressure.

Looking ahead, Baidu’s AI-driven transformation offers promise but also challenges. Heavy investment in AI R&D has weighed on profitability, leading to negative free cash flow in the first two quarters of 2025. AI growth is poised to be a key pillar for the future, but success will hinge on monetizing AI search and accelerating cloud expansion to restore sustainable growth.

Baidu Faces Stiff Competition in Advertising Business

Alphabet GOOGL dominates global search advertising, posting $71.3 billion in the second quarter of 2025, accounting for 74% of total revenues versus Baidu’s $16.2 billion. Alphabet's unparalleled scale stems from vast data-driven targeting, global reach, and integration of AI across search and ads. Backed by innovations like mobile-friendly algorithms, product listings, flight search and Google Now, Alphabet consistently expands engagement and monetization. Compared to Baidu’s regional strength in China, Alphabet’s diversified services, advanced ad tools and worldwide dominance give it clear competitive superiority.

Microsoft MSFT, through Microsoft Advertising, delivers pay-per-click ads across Bing, Yahoo!, DuckDuckGo, and its vast ecosystem, including Windows, Outlook and Xbox. Microsoft stands out with lower CPCs and premium placements due to less competition, especially in high-value industries. Its deep integration with LinkedIn provides unmatched professional targeting that Baidu cannot match. Powered by AI, Microsoft’s Copilot enhances search with conversational formats, boosting ad clicks by 30% and speeding searches by 12%, underscoring Microsoft’s growing edge in digital advertising.

BIDU’s Price Performance, Valuation & Estimates

Baidu’s shares have gained 14.2% in the year-to-date period, outperforming the Zacks Internet - Services industry and the Zacks Computer and Technology sector’s growth of 13.4% and 13%, respectively.

BIDU’s YTD Price Performance

From a valuation standpoint, BIDU’s forward 12-month price/earnings ratio is 10.63, far below the industry average of 21.24. BIDU has a Value Score of C.

BIDU’s Valuation

The Zacks Consensus Estimate for the full-year 2025 earnings is pegged at $8.32 per share, down 3.9% over the past 30 days, indicating a 20.99% year-over-year decline.

Baidu currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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