Generative AI And Apollo Go Will Redefine Digital Economy

Key Takeaways

• Baidu's advances in generative AI, cloud, and foundational models are accelerating high-margin growth and diversifying earnings through new subscription and commercial applications.
  
• Unique AI stack, global expansion, and innovative partnerships position Baidu as a dominant, self-sufficient leader in China's digital and AI-driven economy.
  
• Heavy investment in AI initiatives has yet to offset declining core business, leading to ongoing margin pressure and uncertain profitability amid regulatory and market challenges in China.

Catalysts

Provides online marketing and non-marketing value added services through an internet platform in the People’s Republic of China.

• Analyst consensus sees Baidu's AI Cloud growth as strong, but this view may understate the transformative impacts from breakthroughs in large-scale stable deployment, end-to-end cost optimization, and a rapidly scaling subscription-based revenue model, which could drive an even sharper acceleration in both top-line growth and long-term margin expansion for Baidu.
  
• Analysts broadly agree about the expanding commercial applications for Baidu's foundational models like ERNIE and AI-powered Search, but the narrative underappreciates the magnitude of product-led disruption-over 64% of mobile search is now AI-generated, and new formats like AI-native agents, digital humans, and integrated task-completion agents could make Baidu's core ad and subscription businesses significantly more lucrative and structurally higher margin.
  
• Baidu is uniquely positioned to capitalize on the exponential proliferation of generative AI and automation across China's digital economy, especially as its comprehensive 4-layer AI stack and self-sufficient chip strategy allow it to absorb surging demand from an increasingly AI-centric business landscape, thereby cementing its dominance in cloud, foundational model APIs, and paid AI-powered developer services, supporting robust revenue compounding well into the next decade.
  
• The international expansion of Apollo Go, boosted by exclusive partnerships with Uber and Lyft, places Baidu many years ahead of global peers in operational scale, cost structure, and both left-hand and right-hand drive markets-opening up outsized, high-margin service revenue opportunities in large, high-fare geographies worldwide.
  
• Baidu's rapid deployment of generative AI to lower-code/no-code tools (such as Miaoda) and to new business paradigms (digital humans in livestream commerce, verticalized agent services) creates entirely new, high-velocity monetization channels, accelerating earnings growth and providing structural diversification away from legacy ad revenues.

Baidu Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Baidu compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Baidu's revenue will grow by 8.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 19.0% today to 15.5% in 3 years time.
• The bullish analysts expect earnings to reach CN¥26.7 billion (and earnings per share of CN¥81.82) by about August 2028, up from CN¥25.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, up from 8.6x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 13.6x.
• Analysts expect the number of shares outstanding to decline by 1.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.0%, as per the Simply Wall St company report.

Baidu Future Earnings Per Share Growth

Risks

• Baidu's core online marketing revenue declined fifteen percent year-over-year in the reported quarter, demonstrating substantial pressure on its legacy search business that is exacerbated by secular shifts away from traditional search towards AI-driven closed ecosystems such as WeChat and Douyin, which may continue to weigh on future revenue and earnings.
  
• Despite significant AI cloud revenue growth, the company's total revenue and Baidu Core revenue both declined year-over-year, while the cost of revenue increased twelve percent year-over-year due to rising AI cloud and content costs, indicating that heavy investments in new areas have yet to offset structural pressures, leading to margin compression and negative free cash flow, which could persist if new AI initiatives do not become profitable at scale.
  
• Management explicitly highlighted that the AI transformation of search is still in its early stages, with large-scale monetization not yet underway and the near-term outlook for both revenue and margin expected to be "under significant pressure," suggesting continued risk to earnings if the new AI-native models cannot replace lost advertising income.
  
• Baidu continues to be heavily exposed to China both as a market and a regulatory environment, and with cash flow negative due to aggressive AI investment, any further tightening of Chinese data privacy, antitrust, or digital content regulations-combined with demographic headwinds-could constrain its addressable market and limit revenue growth.
  
• The success of capital-intensive and as yet unprofitable ventures such as autonomous driving (Apollo Go) depends on global expansion and scaling partnerships with Uber and Lyft, but long-term profitability is vulnerable to escalating geopolitical risk, possible technology restrictions, and intensifying international competition, all of which may prevent Apollo Go from becoming a meaningful contributor to net margins or earnings for several more years.

Valuation

• The assumed bullish price target for Baidu is $135.15, which represents two standard deviations above the consensus price target of $99.59. This valuation is based on what can be assumed as the expectations of Baidu's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $145.76, and the most bearish reporting a price target of just $71.14.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CN¥171.7 billion, earnings will come to CN¥26.7 billion, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of $89.07, the bullish analyst price target of $135.15 is 34.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.