Summary of Key Points
In 2026, Baidu's AI business accounted for 50% of its general revenue for two consecutive quarters, yet the capital market responded tepidly (with the U.S. stock market falling by 12.75% on a single day). The reason is that Baidu's AI is not a unified "new business" but consists of five distinct initiatives with varying development speeds: cloud infrastructure, AI applications, AI-powered marketing, Kunlun Chip, and Apollo—each operating like clocks in different time zones. Some are already generating revenue (cloud), some are still seeking ways to charge users (AI applications), some are reworking old models (search), some are preparing for an independent listing (Kunlun Chip), and some are globally operational but have not yet clarified their financial viability (Apollo). The lack of synergies among these businesses has resulted in Baidu's overall growth, cash flow, and valuation falling short of market expectations for a "new Baidu."
Detailed Analysis
1. Why Did the Stock Price Drop Despite AI Accounting for More Than Half of Revenue? — It's Not That AI Is Weak, but the Different Initiatives Are Not Synchronized
The fact that AI revenue accounted for 50% of Baidu's total is a milestone. However, the second-quarter financial report contained two issues that disappointed the market:
- Overall Revenue and Profit Failure to Meet Expectations: Although the AI business grew by 2.5 billion yuan year-over-year, the traditional advertising business (the old search model) declined by 3.2 billion yuan, leading to a 4% decrease in overall general revenue.
- Disynchronization of the Five Initiatives: Cloud revenue fell by 17% quarter-on-quarter due to fluctuations in large corporate contract deliveries, AI applications only grew by 3% (without finding stable revenue sources), and Apollo's orders dropped from 3.2 million to 1 million (due to regulatory adjustments). The market did not see an overall upward trend for the "new Baidu" and felt that the increase in AI's share of revenue was merely a result of the shrinkage of traditional businesses.
In short, while it is true that AI accounts for more than half of Baidu's revenue, it has not made up for the decline in traditional businesses and has not demonstrated its ability to drive growth on its own.
2. Cloud: The First Business to Generate Revenue — A Solid Cash Source
The cloud business is the most tangible and profitable part of Baidu's AI efforts:
- Rapid Revenue Growth: Cloud infrastructure revenue from AI increased by 50% year-over-year, with GPU cloud (where companies rent computing power for AI tasks) growing by 283%, showing three consecutive quarters of double-digit growth.
- Profitability Improvement: The profit margin on the cloud business has improved, and GPU cloud is more profitable than traditional CPU-based clouds. As more companies use it, profits are expected to rise further.
- High Capital Expenditure: However, capital expenditure in the second quarter was 11.4 billion yuan (far exceeding operating cash flow of 3.4 billion yuan), mainly used for purchasing GPUs and building data centers.
The cloud business is like a "gas station" for AI: companies rent computing power when needed. This revenue is tangible, but the costs of building and maintaining these facilities are high, resulting in negative free cash flow in the short term.
3. The Struggle Between Old and New in Search
Search is Baidu's core business, but AI is changing its profit model:
- Old Model: Users search for information → click on links → advertisers bid for ad space (high margins).
- New Model: AI provides direct answers → users avoid clicking on links → fewer ad impressions and lower bidding activity.
Baidu's online marketing revenue decreased by 19% in the second quarter. This is due to weak overall advertising demand and the company's decision to prioritize improving the AI search experience over adding more ads. This is a transitional phase where AI makes search more efficient but sacrifices short-term ad revenue while searching for new profit models.
4. Kunlun Chip & Apollo: Technologically Leading, But Financially Uncertain
These initiatives represent Baidu's advanced technology:
- Kunlun Chip: From internal use to external sales, revenue is expected to exceed 3.5 billion yuan in 2025 (half from external clients), with plans for an independent listing. The challenge is whether it can maintain its technological advantage and attract more customers compared to larger chip manufacturers like Huawei.
- Apollo: A leader in global robotics taxis (with a cumulative mileage of 350 million kilometers and fully autonomous operations in Dubai), but orders dropped from 3.2 million to 1 million in the second quarter due to regulatory changes. The key question is whether the business model can cover costs such as depreciation, maintenance, and labor.
These initiatives showcase Baidu's technological strength, but the market wants to see when they will become profitable.
5. Why Is the Capital Market Unimpressed? — It Depends on Whether the Different Initiatives Can Work Together
Baidu's current market value is around $30 billion, while its cash and investment assets total about $41.7 billion (not all in cash). This indicates that the market believes:
- Traditional businesses are declining.
- Although each AI initiative has potential, there is no clear synergistic effect (e.g., whether cloud profits can support Apollo's development, or whether Kunlun Chip can reduce cloud costs, or whether AI applications can drive traffic to search).
What the market wants is not five separate AI assets but an integrated AI ecosystem that generates continuous revenue. Only when the cloud business's profits support other initiatives, the new search model finds profitable ways to generate income, and Kunlun Chip and Apollo become independent sources of revenue, will Baidu achieve the valuation expected for a "new company."
In Conclusion
Baidu's AI has indeed become a significant part of its business, but to gain market recognition as a "new Baidu," it needs to synchronize these five initiatives: transform technology into products, products into revenue, revenue into cash, and cash into innovation, creating a self-sustaining profit cycle. This is the most critical challenge for Baidu in the coming period.