Despite achieving its largest year-on-year revenue growth for Baidu Intelligent Cloud in the fourth quarter of the previous year, investor confidence in Baidu seems to remain tepidOver the past month, several major Chinese internet firms have seen substantial rises in stock prices, fueled by the buzz surrounding the AI model DeepSeekFrom January 14 to now, Alibaba's stock has surged over 60%, and Tencent's shares have reached new three-year highs, bouncing back to the 500 HKD markHowever, Baidu, which has invested heavily in artificial intelligence, appears not to enjoy the same market enthusiasm.

On February 18, after releasing the financial report for the fourth quarter and the entire year of 2024, Baidu's stock price on the U.S. markets plummeted by 7.51%. Prior to the report's release, shares in Hong Kong already declined by 7.25%, continuing a sluggish trend even after the earnings announcement, with a further drop of 2.11% the following day.

In the past week, Baidu has been rapidly realigning its business strategyThe company announced its decision to open-source the upcoming Wenxin large language model 4.5, and Wenxin Yiyan will be completely free to usersMost of Baidu’s products, including Baidu Search, Baidu Maps, Wenxin Yiyan, and Xiaodu, are now integrated with the DeepSeek large model.

During the earnings call, CEO Robin Li emphasized that 2024 is a pivotal year for the company as it transitions from an internet-centric focus to one led by artificial intelligenceHe expressed confidence that investments made in AI would yield substantial results by 2025.

One of the few bright spots in Baidu's quarterly performance was the growth of its Intelligent Cloud revenueIn the fourth quarter of 2024, Baidu's total revenue fell by 2% year-on-year to 34.1 billion RMBStripping out the larger decline from iQIYI, Baidu's core revenue amounted to 27.7 billion RMB, reflecting a 1% increase over the same period last year.

Online marketing revenue accounted for 17.9 billion RMB, a year-on-year decrease of 7%. Simultaneously, non-online marketing revenue grew by 18% to 9.8 billion RMB, largely due to the momentum from its Intelligent Cloud division, which contributed around 80% to this segment's income.

For the past year, Baidu's Intelligent Cloud has emerged as nearly the sole area of growth in bettering the company's financial disclosures

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This business unit has shown upward revenue growth for multiple quarters, though it has remained consistently within a growth rate range of 11% to 14% from Q4 of 2023 through Q3 of 2024.

The last quarter of 2023 marked one of the fastest growth periods for Baidu's Intelligent Cloud business, with reported revenue growth of 26% year-on-year — more than double the rate of the prior quarterBaidu's acting Chief Financial Officer, He Junjie, attributed the growth in the Intelligent Cloud division to compensating for the weakness observed in online marketing.

Shen Dou, President of Baidu's Intelligent Cloud Business Group, revealed during the earnings call that the increase in Intelligent Cloud business had contributed to a 17% revenue growth for the entire division year-on-year, with revenues generated related to generative artificial intelligence almost tripling year-on-year.

Baidu cited numerous figures to substantiate the positive trajectory of its Intelligent CloudFor instance, by December last year, the Wenxin series models achieved an average of 1.65 billion API calls each day, marking a 178% quarter-on-quarter increase in external API callsFurthermore, the monthly active users of Baidu’s AI functionalities reached 94 million by the end of last year, with subscription revenues from Baidu Wenku (Baidu Library) witnessing a 21% year-on-year rise for the quarter.

However, the once-promising growth within the Intelligent Cloud section became overshadowed by DeepSeek's riseAs discussions pivoted to the expansive applications of generative AI, analysts expressed concerns over Baidu's capacity to maintain its leading role in large language models amidst burgeoning competitionA report by Bloomberg candidly noted, "Baidu may be squandering its leadership position in AI."

During the earnings call, analysts pressed the management on their perception of DeepSeekRobin Li reiterated his prior comments at the World Government Summit, emphasizing that he had learned from DeepSeek how open-source models could accelerate technology proliferation and application.

"What we learned from DeepSeek is that making the top-tier models open source for everyone can significantly push forward their application,” Li stated, suggesting a noticeable alteration in his previously staunch opposition to open-source frameworks within the AI sector.

Baidu has since announced the open-sourcing of its Wenxin large model version 4.5, with Li asserting that the decision stemmed from the company's strong confidence in its technological edge, built from decades of ongoing research and development investments, and unprecedented technical innovations

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Baidu is among the few firms globally capable of full-stack AI.

Despite this perception, Li’s repeated assertions may not fully allay market concerns, as evidenced by the stock’s lackluster performance over recent days, even leading to panic within the market regarding his attendance at meetingsBefore the financial report, shares in Baidu dropped sharply by 7.25%, with intra-day losses reaching over 8%.

In some respects, Baidu's stance on the large model market exhibits a contradictionThroughout the earnings call, both Li and other executives continuously highlighted the current phase of AI development as still in its nascent stages, acknowledging rapid technological advancements while also reiterating a commitment to an application-driven strategy.

Li underscored the belief that core models possess real value only insofar as they can effectively address real-world problems on a large scale, advocating for continuous iteration of the Wenxin model focused on practical applications.

Coinciding with Baidu's financial report, Elon Musk’s AI startup xAI unveiled the Grok3 large modelMusk proclaimed Grok3 to be the most intelligent AI on Earth, outperforming DeepSeek-V3 and GPT-4o across various benchmark testsRemarkably, xAI has been operational for only 20 months.

In the wake of the explosion of large language models driving an AI revolution, numerous startups, including DeepSeek and Moonlight, have made significant technical advances, which could signal an uncomfortable truth for Baidu — that in the face of new technologies, it stands on the same starting line as many of its competitors.

Even though Baidu's Intelligent Cloud revenue continues to grow, the company's financial structure is still predominantly reliant on advertising revenue, which represented 64% of its core income last year, affirming its status as the largest revenue source.

This advertising segment has experienced a decline for three consecutive quarters

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Luo Rong, the new head of Baidu's mobile ecological business group, attributed the dip in ad revenue during the earnings call to overall market conditions, promising that growth opportunities are on the horizon and indicating that the business should progressively improve. "The performance in the first half of this year will exceed that of last year's fourth quarter, and the second half will see further improvements over the first half,” he noted.

Luo emphasized new avenues of growth stemming from their explorations in AI search, claiming that AI-driven search results now constitute 22% of total queriesHe asserted that optimizing their AI search functions could establish a higher quality user experience and consequently drive profit margins.

Market observers generally express concerns regarding the impact of AI on the traditional search engine revenue model founded on bid-based rankingsWhen Wenxin Yiyan was introduced, Li was queried about this potential shift, to which he vaguely responded that numerous commercial possibilities exist, asserting his belief that market mechanisms would deliver returns.

During a recent global conference, Baidu presented several application instances targeting the B-end market, including leveraging various company-centric AI to aid in sales and shopping guide functionalities — indicative of Baidu's explorative ventures in new territoriesHowever, the company has yet to disclose the market performance of these initiatives.

External apprehension regarding Baidu Search mainly stems from competition with social platforms such as WeChat, Douyin, and XiaohongshuReports late last year indicated that Xiaohongshu's average daily search volume had reached 600 million, approximately 50% of Baidu’s daily search volumeNeither company offered comments on this matterJust a few days before, WeChat began beta testing AI search functionalities integrated with the DeepSeek large model, igniting significant market discussion.

Luo remarked during the earnings call that the fusion of search capabilities with large model functions ideally positions Baidu to lead in the AI-driven search transformation, highlighting that 83% of Baidu's active users would employ large model features

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