The market is not looking very far ahead in this case, because before it can be a potential beneficiary, Baidu is also a victim of AI. Its online advertising segment, which is directly linked to its search engine, has seen its fifth consecutive quarter of declining revenue.
The pill was particularly hard to swallow in Q2, as revenue in this segment fell by 15.7% sequentially: in Q1 the decline was just 6.1%.
It is therefore thanks to new cloud activities—which are direct beneficiaries of AI—that the group's consolidated revenue has remained stable.
This segment, which now accounts for over a third of the total, posted robust growth of 34.6% over three months. In the first quarter, growth was even stronger, at 40.1%.
However, the transition is costly. It is weighing on Baidu's gross margin, with pre-tax profits down by a quarter y-o-y and its financing is also putting pressure on cash flow.
Nevertheless, at this price, Baidu is trading at a significant discount to the value of its assets. Its online advertising and cloud activities – "Baidu Core" – are worth at least $25bn.
Reasonable multiples are used to arrive at this figure. Worse still, Apollo, Baidu's autonomous taxi business, which is the global leader in the sector ahead of Waymo and local competitors such as WeRide and AutoX, is valued at... zero.
Next come the group's cash and various investments. With a 30% discount, these are valued at $20bn. The sum of the parts therefore comes to $45bn, compared with a current market capitalization of $30bn.
However, new generative AI technologies could revive the online advertising segment, while cloud activities are riding a long-term trend and Apollo could well become a key player in China.
There are a lot of "ifs" here, of course. But one thing is clear: the market doesn't believe in it at all, unless it has completely lost interest, that is.
