Baidu's AI search initiative is driving growth but also poses challenges. The company prioritizes increasing AI search's share of overall enquiries before monetizing ad demand, potentially delaying revenue growth. This leads to a 1-6% cut in core ad revenue forecasts for 2025-27e. While cloud revenue saw a strong 42% year-on-year increase to RMB6.7bn, driven by enterprise cloud subscriptions, particularly GAI-related services. However, the shift towards higher-margin offerings is gradual, and AI cloud Non-GAAP OPM is still in the low-teens percentage range.
Core ad revenue fell 6% y-o-y due to increased AIGC search results (up to 35% in April), reducing traditional ad inventory. Despite this, AIGC ad performance improved, with over 29k advertisers using ERNIE agents daily. Agent-related ad revenue grew 30x y-o-y, reaching 9% of core ad revenue in 1Q25.
Apollo Go expanded to 15 global cities, with over 1,000 fleets and a strategic partnership with Car Inc for autonomous vehicle rentals, indicating potential for rapid ride-hailing order growth and improved profitability in 2025.
The research maintains a Hold rating with a lowered target price of USD84, reflecting a 6% downside. The forecasted margin trajectory is impacted by the cloud growth acceleration and more conservative ad growth assumptions. A meaningful uptick in shareholder commitment and a fair 9x 2025e PE valuation support the Hold rating.
