(Bloomberg) – Baidu Inc. reported a smaller-than-expected revenue drop for the fourth quarter, easing concerns that its core businesses in internet search and artificial intelligence are faltering under growing competition. However, the company’s stock fell over 4% in pre-market trading, reflecting investor unease over its market position.
Revenue Decline and AI Expansion
For the quarter ended December 2023, Baidu’s revenue declined 2% year-over-year to 34.1 billion yuan ($4.7 billion)—a figure that surpassed analyst estimates of 33.4 billion yuan. Despite the revenue dip, net income grew, thanks to a one-time foreign currency gain and accounting adjustments.
Baidu’s AI-driven cloud business was a bright spot, with cloud revenue surging 26% quarter-over-quarter, more than twice the pace of growth in the previous three months. This growth was fueled by demand from startups and developers seeking computing power for AI projects. However, it was not enough to offset weakness in Baidu’s core search and advertising businesses.
Challenges in Search and AI
Baidu is facing growing pressure from social media apps like Xiaohongshu and ByteDance’s Douyin, which are attracting more advertising revenue. The company is also contending with China’s economic slowdown, which has weakened demand for digital ads.
Meanwhile, competition in the AI sector is intensifying. Hangzhou-based startup DeepSeek recently unveiled AI models that rival leading Western platforms, threatening Baidu’s position as China’s AI leader. The emergence of open-source AI models, which are significantly cheaper to train, has undermined Baidu’s proprietary approach, which required years of investment in research and development.
Baidu’s Strategic Response
In a surprise move last week, Baidu announced it would open-source its AI models, following the lead of DeepSeek and Tencent. Additionally, it has integrated DeepSeek’s latest R1 model into its flagship chatbot Ernie, mirroring Tencent’s strategy.
Despite being the first major Chinese company to commercialize an AI-powered chatbot, Baidu has struggled to monetize its Ernie chatbot effectively. Initially offered as a paid service with an $8 monthly subscription, the company has since made it free and refunded users.
Market Reactions and Analyst Concerns
Analysts remain cautious about Baidu’s future. Bloomberg Intelligence analyst Robert Lea pointed out that:
“Baidu’s weak operating metrics underscore the scale of its challenges, as adjusted operating profit fell 29% annually to $5 billion, driven by a hefty 7% decline in Baidu Core Ad sales. Strengthening momentum in Baidu’s AI Cloud business provides encouragement, though lower margins in AI won’t offset the weakness in ads.”
Meanwhile, Baidu remains one of China’s key AI investors and is working with Apple Inc. to develop AI-powered image search features for the iPhone in China. However, content censorship responsibilities for Apple’s AI system are expected to fall on Alibaba, which could indicate Beijing’s shifting priorities in AI partnerships.
Robin Li’s Absence from Key Government Meeting
Adding to the uncertainty, Baidu’s billionaire founder Robin Li was absent from state media coverage of a high-profile meeting with Chinese President Xi Jinping, where tech moguls such as Jack Ma and DeepSeek executives were present. This absence has raised speculation about Baidu’s standing with the Chinese government, which is counting on private-sector growth to revive the economy.
Li did, however, join Baidu’s post-earnings call, emphasizing the company’s commitment to AI transformation.
“While AI chatbots represent an important but early phase in AI application development, the killer app today has not yet emerged,” said Baidu’s interim CFO Junjie He.
“For us, the key is to maintain this rapid and determined pace of AI transformation, focusing on discovering what users truly need and want for the next generation of search.”
Looking Ahead
While Baidu remains a key player in China’s AI industry, it is increasingly losing ground to up-and-coming rivals like DeepSeek and Tencent. The company’s decision to open-source its AI models may help it stay competitive, but monetizing AI services and regaining advertising market share remain critical challenges.
With its stock under pressure and competition intensifying, Baidu’s ability to adapt to China’s rapidly evolving AI landscape will determine whether it remains a leader or falls further behind in the race for AI dominance.
