Baidu's stock took a hit Tuesday after the Chinese tech giant reported second-quarter results that came up short of Wall Street's expectations. The headline numbers were a mixed bag: revenue dipped 4% year over year to 31.3 billion yuan ($4.62 billion), just shy of the $4.65 billion analysts had penciled in. Adjusted earnings of 7.22 yuan ($1.06) per American depositary share also missed the $1.35 consensus estimate.
The culprit? Baidu's bread-and-butter advertising business is losing steam. Online Marketing Services revenue tumbled 19% year over year to 13.1 billion yuan, a stark reminder that even China's search giant isn't immune to ad market headwinds.
But here's the twist: while the ad machine sputters, Baidu's AI engine is firing on all cylinders. AI Cloud Infrastructure revenue surged 50% to 7.3 billion yuan, and GPU Cloud revenue exploded 283%. AI Applications revenue grew 3% to 2.5 billion yuan, and AI-native Marketing Services held roughly flat at 2.6 billion yuan. Overall, Baidu Core AI-powered Business revenue climbed 25% to 12.5 billion yuan, now accounting for half of General Business revenue.
That AI momentum is the story investors want to hear, but it's not yet enough to offset the ad slump. General Business revenue, which includes most of Baidu's core operations, fell 4% to 25.2 billion yuan, with an operating margin of 12% (15% on an adjusted basis). Meanwhile, iQIYI, Baidu's video streaming arm, saw revenue decline 5% to 6.3 billion yuan, posting a negative 2% operating margin.
On the operational side, Baidu's AI adoption metrics look promising. AI daily active user penetration across Baidu Wenku and Baidu Drive jumped 27.4% year over year in June, and Baidu App monthly active users hit 644 million. Apollo Go, Baidu's robotaxi service, expanded to 28 cities and surpassed 350 million cumulative autonomous kilometers, including over 240 million fully driverless kilometers. The service also launched fully driverless commercial operations in Dubai and began open-road testing in London and Switzerland. Baidu even signed a memorandum of understanding with Kazakhstan's Turlov Private Holding Ltd. to explore autonomous ride-hailing services.
But the AI push comes at a cost. Capital expenditures more than doubled sequentially to 11.39 billion yuan from 5.92 billion yuan in Q1, driving free cash flow to negative 7.95 billion yuan, worse than both the prior quarter's negative 3.25 billion yuan and the year-ago negative 4.68 billion yuan. Operating cash flow did improve to 3.4 billion yuan from 2.67 billion yuan in Q1, and compared favorably to an outflow of 877 million yuan a year earlier.
Baidu ended the quarter with 24.5 billion yuan in cash and cash equivalents, and total cash and investments stood at 283.1 billion yuan. Other income, net, fell to 184 million yuan, which Baidu attributed mainly to lower fair-value gains on long-term investments and higher net foreign-exchange losses.
Looking ahead, Baidu expects the conversion of its Hong Kong listing to a dual-primary listing to take effect in 2026, subject to shareholder and exchange approvals. Management reiterated its commitment to investing in AI as a core driver of long-term growth.
Investors, however, are voting with their feet. Baidu shares were trading 7.05% lower at $96.78 in Tuesday's premarket session.
