Freedom Broker: Baidu bets on AI, but pays for it with margins

Freedom Broker maintained its “Buy” recommendation on shares of Baidu, Inc. (BIDU), but lowered the target price from $180 to $160. At the current price of $93,50, the upside potential is 71,12%. Analysts believe the AI business is already becoming Baidu’s main growth driver; however, the accelerating decline in traditional advertising revenue and rising AI costs are limiting the financial impact of the transformation.

What is known about Baidu

Baidu, Inc. (BIDU) is one of China’s largest technology companies. The company develops a search engine, online advertising, cloud technologies, artificial intelligence, and autonomous driving. Baidu’s ecosystem also includes the iQIYI video service.

AI becomes half of the core business

According to Freedom Broker experts, Baidu’s ability to develop and monetize AI initiatives while keeping expenses under control remains the key factor for the stock’s performance in the coming quarters. In Q1 2026, the AI business for the first time generated more than 50% of revenue in Baidu’s core business. In Q2, its revenue totaled 12,5 bn yuan ($1,84 bn) and increased by 25% year over year. The share of the AI segment in Baidu General Business revenue reached 50% versus 38% a year earlier. 

The highest growth rates were posted by the cloud AI business: AI Cloud Infra revenue totaled 7,3 bn yuan ($1,08 bn), up 50% year over year. At the same time, revenue from the GPU-powered cloud service, GPU Cloud, grew 283% year over year after a 184% increase in the previous quarter.

 Revenue from AI Applications software tools reached 2,5 bn yuan ($370 mln) and increased by 3% year over year. Another 2,6 bn yuan ($379 mln) came from the digital marketing and online advertising ecosystem; the figure remained roughly at last year’s level. 

Advertising continues to decline

Baidu General Business revenue in Q2 totaled 25,2 bn yuan ($3,71 bn) and fell 4% year over year and 3% quarter over quarter. Legacy Business revenue (core lines of business) was 10,4 bn yuan ($1,53 bn), down 23% from a year earlier. Baidu Online Marketing Services revenue was 13,1 bn yuan ($1,93 bn) and declined 19% year over year, but rose 4% quarter over quarter. MAU (unique users) of the Baidu app in June totaled 644 mln, versus 655 mln in the previous quarter and a 12% decline year over year.

Financial results below expectations

Baidu’s total revenue in Q2 totaled 31,3 bn yuan ($4,62 bn), down 4% year over year and 2% quarter over quarter. The figure came in 1,5% below the consensus forecast. Net profit was 2,3 bn yuan (about $340 mln). Operating profit was 3,0 bn yuan ($446 mln), and operating margin was 10%. Adjusted EBITDA reached 6,2 bn yuan ($0,91 bn) with a 20% margin.

At the same time, Baidu has maintained positive operating cash flow for the fourth consecutive quarter. In Q2, the figure totaled 3,4 bn yuan ($500 mln). Total cash and investments as of June 30 reached 283,1 bn yuan ($41,72 bn).

Rising costs remain a risk

Cost of services was 19,1 bn yuan ($2,81 bn) and increased by 4% year over year. At the same time, Baidu is cutting other expenses: general and administrative expenses fell 23% year over year to 4,6 bn yuan ($677 mln), while R&D expenses decreased 10% to 4,6 bn yuan ($679 mln).

Freedom Broker notes that expense optimization partially offsets the increase in spending on AI infrastructure. However, a further rise in spending on computing power amid competition remains one of the key risks to profitability. 

Apollo Go expands beyond China

Another growth area is autonomous transportation. Apollo Go continued its international expansion and is already present in 28 cities. The total mileage of its autonomous vehicles exceeded 350 mln km, including more than 240 mln km of fully driverless operation.

In Q2, Apollo Go began testing on public roads in London in partnership with Uber and Lyft. In Dubai, the service launched fully driverless commercial rides. In Hong Kong, Apollo Go received the city’s first permits for fully driverless testing. In addition, Baidu signed a memorandum with Turlov Private Holding Ltd. to jointly explore opportunities to launch an autonomous taxi service in Kazakhstan.

What supports growth

Analysts see the main growth drivers as the rollout of Baidu’s AI initiatives, successful cost control for AI development, and a recovery in demand in China’s online advertising market.

Key risks include further loss of advertising market share, higher costs to support AI computing, and a weak recovery in the Chinese economy.

Baidu’s metrics in the previous quarter

In May 2026, Baidu reported Q1 results above analysts’ expectations: revenue totaled 32,08 bn yuan ($4,65 bn), and revenue from Baidu Core AI-powered Business exceeded 13,6 bn yuan, increasing 49% year over year. The AI segment for the first time generated more than 50% of core business revenue. Net profit, however, fell to 3,45 bn yuan ($499 mln) from 7,72 bn yuan a year earlier. Freedom Broker maintained its “Buy” recommendation and a $180 target price.

In early spring, Baidu presented a lineup of AI agents based on OpenClaw, capable of performing complex tasks with minimal user involvement—from creating presentations and editing video to conducting research and ordering goods. Freedom analysts noted that the development of agent ecosystems could increase AI monetization, but at the same time intensify competition and lead to higher capital expenditures.

This is not an individual investment recommendation.