Why Baidu Stock Lags Despite China's AI Leap?

In recent years, Chinese technology stocks have been largely ignored by the market despite the boom in generative artificial intelligence. Yet, this sector has regained attention following the debut of China’s DeepSeek AI model, which offers near ChatGPT-level performance at a fraction of the cost and computing power, underscoring the robust AI capabilities of Chinese companies. Major Chinese tech names have gained momentum over the past few weeks. For example, Alibaba stock has increased nearly 52% since early January, while Tencent stock has risen by more than 25% during the same period. Baidu’s stock (NASDAQ: BIDU) has lagged behind these peers, climbing only about 6% over the same period. Nonetheless, Baidu could see further gains thanks to its advancements in AI—including Ernie Bot and self-driving technology—and by being one of the few publicly traded companies in China’s AI sector.

Why Has Baidu Stock Been Struggling?

Baidu stock has fallen by over 70% from its 2021 peak, largely due to China’s weaker-than-expected economic rebound following Covid-19. The real estate downturn has reduced home prices, diminishing household wealth and consumer confidence, while youth unemployment remains elevated. As China’s largest search engine, Baidu derives over half of its revenue from digital advertising. With small businesses reducing ad budgets, sales on Baidu’s search platforms have slowed, particularly in key sectors such as e-commerce, real estate, and travel. In Q4 2024, Baidu’s online marketing revenue was 17.9 billion yuan (about $2.5 billion), representing a 7% year-over-year decline. The company anticipates that search advertising revenue will turn positive only in the second half of 2025, suggesting that these headwinds may persist through the first half of this year, thereby impacting overall revenue growth.

Baidu’s AI & Cloud Business

Baidu’s AI cloud division experienced a Q4 revenue growth increase to 26% year over year, which helped mitigate the weaknesses in its core online advertising business. Baidu has made significant investments in its AI capabilities, including technologies for robo-taxis and generative AI services. The company reports that its Ernie AI model now receives 1.65 billion daily API calls, with external usage growing by 178% quarter-over-quarter. Additionally, Baidu Wenku’s AI features have reached 94 million MAUs (monthly active users), marking a 216% year-over-year increase. Baidu is also considering open-sourcing its AI models to foster broader adoption. As users integrate more of Baidu’s tools into their applications, this could drive increased use of the company’s cloud services for AI-related tasks, thereby boosting revenues. Nevertheless, there may be uncertainties regarding the impact of generative AI on Baidu’s overall strategy. Baidu might need to develop effective monetization strategies, especially as it incorporates more AI into its core search product, since the current technology offers limited advertising potential. Furthermore, competition in the search space could intensify, as Chinese tech giants like Alibaba and Tencent are developing their own large language models, potentially challenging Baidu’s market position.

Notably, BIDU stock has consistently underperformed the broader market over the past four years. Returns for the stock were -31% in 2021, -23% in 2022, 4% in 2023, and -29% in 2024. The Trefis High Quality Portfolio, which consists of 30 stocks, is less volatile. Moreover, it has comfortably outperformed the S&P 500 over the last four-year period. Why is that? Overall, HQ Portfolio stocks have delivered better returns with less risk compared to the benchmark index; they have experienced a less turbulent ride, as evidenced by the HQ Portfolio performance metrics. In light of the current uncertain macroeconomic conditions, including rate cuts and multiple geopolitical conflicts, could BIDU face a repeat of its past underperformance in 2021, 2022, 2023, and 2024, and underperform the S&P over the next 12 months – or might it recover?

The Chinese government now seems more dedicated to implementing economic stimulus measures to spur growth, indicating a move toward a looser monetary policy and more proactive fiscal spending in recent months. Meanwhile, with a price of about $87 per share, Baidu appears to be very fairly valued. The stock is trading at under 9x consensus 2025 earnings, significantly lower than the nearly 40x multiple it reached during the Covid-19 pandemic. Furthermore, Baidu’s net cash position is approximately $11 billion, roughly one-third of its current market capitalization. Excluding the cash position, Baidu stock trades at about 6x forward earnings, which is quite reasonable. We value Baidu stock at roughly $94 per share, slightly above its current market price. For further details on the company’s revenue trends and how its valuation compares to peers, see our analysis of Baidu Revenue and Baidu Valuation.