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Baidu's Rising Costs Erode Profits: Can Future AI Gains Offset Strain?
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Key Takeaways
Baidu's Q2 revenues fell 4% YoY to RMB 32.7B as rising costs cut margins and profits.
Core online marketing plunged 15% YoY, deepening pressure from higher AI spending.
AI Cloud, the Ernie model and Apollo Go show momentum despite near-term strain.
Baidu, Inc. (BIDU - Free Report) is encountering the squeeze as rising costs erode profits just as management doubles down on AI. The pressure is visible in the margins. In the second quarter of 2025, its cost of revenues climbed nearly 12% year over year as Baidu scaled AI Cloud infrastructure, while higher operating expenses further reduced operating leverage and EBITDA. Management also warned that the advertising environment will remain soft in the third quarter, limiting near-term recovery prospects.
The financial strain is evident. Free cash flow turned negative at RMB 4.7 billion, while revenues declined 4% year over year to RMB 32.7 billion. Core online marketing, still Baidu’s largest revenue stream, dropped 15% year over year in the reported quarter, widening the gap between legacy advertising weakness and heavy AI investments.
Yet, Baidu is laying the groundwork for long-term growth, with AI Cloud momentum driven by enterprise demand, the Ernie model and Apollo Go’s autonomous ride services. By July, 64% of mobile searches already featured AI-generated content, reflecting strong user adoption even before monetization began. Backed by RMB 124 billion in cash and equivalents, the company has the resources to optimize GPU use, secure domestic chip flexibility and refine AI monetization pilots.
The broader AI market offers a powerful tailwind, with global spending projected to rise at a 35.9% compound annual growth rate through 2030, reaching $1.8 trillion, according to a Grand View Research report. For Baidu, the challenge is turning adoption into profits quickly enough to offset advertising declines. Based on these factors, current cash constraints can be viewed as a catalyst for long-term AI-powered growth.
How Global Rivals Stack Up Against BIDU
Alphabet (GOOGL - Free Report) faces similarly large operating cost pressures as it scales up its AI/cloud infrastructure. The company has committed to invest over $85 billion in AI and cloud, driving up operating costs but fueling rapid Google Cloud growth. Alphabet’s dominant ad business, vast ecosystem and global reach provide cash flow and data advantages that Baidu lacks. With its scale, diversified revenues and ability to spread costs across services, the company maintains margin resilience. Ultimately, Alphabet’s superior resources and global dominance make it far stronger than Baidu in the AI race.
Microsoft (MSFT - Free Report) is pouring massive capital into AI infrastructure, especially Azure data centers, committing over $80 billion in fiscal 2025, with costs expected to rise further in 2026. Microsoft’s vast scale, diversified revenue streams and OpenAI partnership help it spread expenses, optimize operations and preserve margins. Unlike Baidu, Microsoft benefits from its global reach, strong Azure growth and greater efficiency in managing AI costs, making it far more resilient and dominant in the AI race.
BIDU’s Price Performance, Valuation & Estimates
Baidu’s shares have gained 36.2% in the year-to-date period, outperforming the Zacks Internet - Services industry and the Zacks Computer and Technology sector’s growth of 27% and 18.9%, respectively.
BIDU’s YTD Price Performance
Image Source: Zacks Investment Research
From a valuation standpoint, BIDU’s forward 12-month price/earnings ratio is 12.62, far below the industry average of 23.74. BIDU has a Value Score of C.
BIDU’s Valuation
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for the full-year 2025 earnings is pegged at $8.32 per share, down by 3.9% over the past 30 days, indicating a 20.99% year-over-year decline.
Image Source: Zacks Investment Research
Baidu currently carries a Zacks Rank #5 (Strong Sell).
Image: Bigstock
Baidu's Rising Costs Erode Profits: Can Future AI Gains Offset Strain?
Key Takeaways
Baidu, Inc. (BIDU - Free Report) is encountering the squeeze as rising costs erode profits just as management doubles down on AI. The pressure is visible in the margins. In the second quarter of 2025, its cost of revenues climbed nearly 12% year over year as Baidu scaled AI Cloud infrastructure, while higher operating expenses further reduced operating leverage and EBITDA. Management also warned that the advertising environment will remain soft in the third quarter, limiting near-term recovery prospects.
The financial strain is evident. Free cash flow turned negative at RMB 4.7 billion, while revenues declined 4% year over year to RMB 32.7 billion. Core online marketing, still Baidu’s largest revenue stream, dropped 15% year over year in the reported quarter, widening the gap between legacy advertising weakness and heavy AI investments.
Yet, Baidu is laying the groundwork for long-term growth, with AI Cloud momentum driven by enterprise demand, the Ernie model and Apollo Go’s autonomous ride services. By July, 64% of mobile searches already featured AI-generated content, reflecting strong user adoption even before monetization began. Backed by RMB 124 billion in cash and equivalents, the company has the resources to optimize GPU use, secure domestic chip flexibility and refine AI monetization pilots.
The broader AI market offers a powerful tailwind, with global spending projected to rise at a 35.9% compound annual growth rate through 2030, reaching $1.8 trillion, according to a Grand View Research report. For Baidu, the challenge is turning adoption into profits quickly enough to offset advertising declines. Based on these factors, current cash constraints can be viewed as a catalyst for long-term AI-powered growth.
How Global Rivals Stack Up Against BIDU
Alphabet (GOOGL - Free Report) faces similarly large operating cost pressures as it scales up its AI/cloud infrastructure. The company has committed to invest over $85 billion in AI and cloud, driving up operating costs but fueling rapid Google Cloud growth. Alphabet’s dominant ad business, vast ecosystem and global reach provide cash flow and data advantages that Baidu lacks. With its scale, diversified revenues and ability to spread costs across services, the company maintains margin resilience. Ultimately, Alphabet’s superior resources and global dominance make it far stronger than Baidu in the AI race.
Microsoft (MSFT - Free Report) is pouring massive capital into AI infrastructure, especially Azure data centers, committing over $80 billion in fiscal 2025, with costs expected to rise further in 2026. Microsoft’s vast scale, diversified revenue streams and OpenAI partnership help it spread expenses, optimize operations and preserve margins. Unlike Baidu, Microsoft benefits from its global reach, strong Azure growth and greater efficiency in managing AI costs, making it far more resilient and dominant in the AI race.
BIDU’s Price Performance, Valuation & Estimates
Baidu’s shares have gained 36.2% in the year-to-date period, outperforming the Zacks Internet - Services industry and the Zacks Computer and Technology sector’s growth of 27% and 18.9%, respectively.
BIDU’s YTD Price Performance
Image Source: Zacks Investment Research
From a valuation standpoint, BIDU’s forward 12-month price/earnings ratio is 12.62, far below the industry average of 23.74. BIDU has a Value Score of C.
BIDU’s Valuation
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for the full-year 2025 earnings is pegged at $8.32 per share, down by 3.9% over the past 30 days, indicating a 20.99% year-over-year decline.
Image Source: Zacks Investment Research
Baidu currently carries a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.