Following a surge to its highest point in 4 and a half months at the end of last month, Baidu Inc (NASDAQ:BIDU) experienced a decline to a 2-and-a-half-month low today, influenced by China’s struggling economic prospects casting a shadow on the stock. Analysts from Citigroup, China International Capital, and Daiwa Capital Markets, among others, have all revised their earnings projections for Baidu. The second-quarter earnings report expected on Tuesday is anticipated to reveal a deceleration in adjusted net income growth for Baidu, as the company contends with Alibaba Group Holding (NYSE:BABA), JD.com (NASDAQ:JD), and Tencent Holdings Ltd (OTCMKTS:TCEHY) for supremacy in China’s artificial intelligence (AI) sector.
Having pioneered Chinese AI through the creation of the country’s first ChatGPT-like service named Ernie BOT, Baidu is regarded as an early frontrunner in the field. Despite the Hang Seng Tech Index experiencing a decline of over -3%, Baidu has managed to achieve a +13% increase in value this year. Nevertheless, setbacks linked to its Ernie BOT service and lackluster consumer expenditure in China have recently exerted downward pressure on Baidu’s stock price. Morningstar has commented that “anticipations have been revised downwards for Baidu in the second quarter and beyond,” attributing this to macroeconomic headwinds and the probability of weaker operating margins due to the expansion of its AI product portfolio.
The slowdown in China’s economic growth is predicted to impede Baidu’s revenue expansion in the AI sector, as the economic deceleration has compelled local governments to tighten their budgets, leading to postponed and reduced capital investments. These concerns prompted Citigroup Global Markets Asia to lower their revenue estimates for Baidu, with the explanation that “given the comparatively higher baseline from the previous year, combined with recent downward adjustments to GDP forecasts, we have cautiously revised downwards” our revenue predictions for AI and advertising in the third quarter.
With escalating competition in the AI domain and a decelerating Chinese economy, Baidu’s future earnings projection remains uncertain. Just last week, Tencent Holdings announced its development of one of China’s premier AI models, while Alibaba Group Holding stated its integration of a ChatGPT-like AI into its conferencing and messaging applications. Union Bancaire Privee also pointed out that “the advancement of generative AI applications is still at an initial stage,” indicating that Alibaba Group Holding and Tencent Holdings could potentially introduce products in this arena.
Nevertheless, the Chinese government has identified AI as one of its twelve tech priorities. After a two-year regulatory clampdown, the government is now encouraging investments in AI technology to compete with the United States and Europe. Moreover, certain analysts remain upbeat about Baidu’s earning prospects. Goldman Sachs affirmed that Baidu remains the best-positioned Chinese internet company, owing to its early pivot toward AI opportunities, even if they have yet to generate profitability. Additionally, Union Bancaire Privee noted that “Baidu is seen as the frontrunner in generative AI due to its more visible investments over the years.”
Featured Image: Freepik @ freepik
