Core views
Baidu's search advertising business is affected by macroeconomic uncertainty, and management's statements on major economic stimulus policies reflect that the business is still under some pressure. We expect this to mean that advertising demand is expected to recover to a certain extent in the second half of the year. Project delivery and new orders in the cloud business may be under certain budget pressure due to enterprise/government procurement. It is recommended to focus on profit release brought about by improved business efficiency. On the ERNIE BOT side, AI automated advertising tools, application development tools, library assistants, etc. will be launched one after another in 24 years. It has broad application scenarios and hopes to build an appropriate business model. I am optimistic about Baidu's layout and first-mover advantage in the AIGC field.
occurrences
Baidu released 4Q23 financial results, profit growth rate was higher than revenue
On February 28, 2024, Baidu released its financial results for 4Q23. Among them, the company achieved revenue of 34.951 billion yuan, +6% year over year; non-GAAP net profit of 7.755 billion yuan, +44% year over year; Baidu's core business 3Q23 achieved revenue of 27.488 billion yuan, +7% year over year; and non-GAAP net profit to parent reached 7.50 billion yuan, +53% year over year.
Brief review
The macro environment still faces uncertainty. Continuing to balance cost reduction and efficiency & AI investment during the 4Q23 earnings conference call, we noticed that management significantly increased their description of the progress of Gen AI and related products, and drastically reduced discussions on the domestic macroeconomy and advertising industry. In the Q&A, management acknowledged that the company paid close attention to major economic stimulus plans (“whichwe think is essential for considering this year's goals”) and that the tone was neutral and weak. On the other hand, management mentioned that it will continue to optimize resource allocation and improve organizational efficiency in '24, but investment in Gen-AI since '23, especially depreciation and amortization of Capex, will gradually become apparent in '24. Overall, management's guidance on non-GAAP OPM is to maintain robustness. Combined with the iQiyi division's profit release pace, from the perspective of marginal changes, Baidu's overall profit side elasticity was less than 23 years.
The revenue contributed by Gen-AI will gradually increase, and product lines such as advertising, cloud, and library will continue to unleash their potential. Management mentioned at the earnings conference that Gen-AI's impact on revenue is hundreds of millions (hundreds of millions), and the 24-year incremental revenue is expected to be several billion yuan. On the product side, Baidu adjusted the organizational structure and personnel of the search/library: Baidu upgraded the library business department to BU in February 2024, while Zhao Shiqi, the former vice president of Baidu, returned from Huawei to be the head of the search platform; departments such as Baijia Business Operation Department, Hot Spot Operation Department, Content Ecosystem Operation Management Department, and Artificial Intelligence Creation Product Department were incorporated into the information distribution platform. The relevant business leaders reported to Baidu App General Manager Li Xiaowan. Furthermore, Baidu MEG leader He Junjie's 1Q24OKR aims to “lead the development of the AI industry, restructure representative scenarios, and reap benefits.” Therefore, Baidu expects to further introduce AI to unleash the user activity and commercialization prospects of existing product lines.
Intelligent driving has made positive progress, and accelerated commercialization is expected to gradually contribute to performance. In 4Q23 Baidu Autonomous Driving completed a total of 839,000 orders, an increase of 49% over the previous year. As of December 2023, Baidu had provided more than 5 million orders to the public. Baidu has a leading layout in the field of autonomous driving. With the launch of smart cars equipped with Baidu's autonomous driving-related products, Baidu's autonomous driving business is expected to gradually become commercialized and begin contributing substantial revenue in '24.
Investment advice: Baidu's search advertising business is affected by macroeconomic uncertainty, and management's statements on major economic stimulus policies reflect that the business is still under some pressure. We expect this to mean that advertising demand is expected to recover to a certain extent in the second half of the year. Project delivery and new orders in the cloud business may be under certain budget pressure due to enterprise/government procurement. It is recommended to focus on profit release brought about by improved business efficiency. On the ERNIE BOT side, AI automated advertising tools, application development tools, library assistants, etc. will be launched one after another in 24 years. It has broad application scenarios and hopes to build an appropriate business model. I am optimistic about Baidu's layout and first-mover advantage in the AIGC field. Maintain the Baidu Group's “buy” rating.
Risk analysis
New business development falls short of expectations: AIGC and related new technology fields are still in a stage of rapid development, and there is a big gap between technology maturity. Current development expectations may be overly optimistic, and there is still great uncertainty about the actual development of the business.
Changes in the macro or industry environment: Since part of the company's business is in a period of exploration or growth, the business model is not yet mature, and at the same time, the macro and industry environment may develop and change, most predictions about the future at the present time rely on the assumption that the environment has not changed much or is basically stable. If there are major changes in the macro and industry environment, the impact on the company's business may exceed our expectations.
Competition intensifies risk: Some of the company's businesses, such as search ads, face the diversion of short videos and in-app searches, as well as threats from competitors such as Sogou, 360, and Bing.