Advertisements are disrupted by macroeconomic factors, and the impact of AI investment confirmation on profit margins is manageable, maintaining a “buy” rating
Short-term Baidu's core advertising revenue is affected by weak macroeconomic recovery, and AI-generated content in searches has yet to be monetized. We slightly lowered the company's 2024-2026 non-GAAP net profit forecast to 274/310/34 billion yuan (previous value: 281/316/34.1 billion yuan), corresponding to a year-on-year growth rate of -4.6%/12.8%/9.9%, corresponding to the adjusted diluted EPS 9.5/10.6/11.4 yuan. The current stock price of 110.9HKD corresponds to 2024-2026 10.8/ 9.7/9.0 times PE Considering Baidu's Wenxin model and Wenxin's one-word advantage, the future expansion of generative AI's contribution to advertising and cloud revenue is expected to drive up valuation and maintain a “buy” rating.
2024Q1 revenue was basically in line with expectations, and profit exceeded expectations in 2024Q1, Baidu's revenue increased 1.2% year on year, which was basically in line with Bloomberg's agreed expectations; non-GAAP net profit increased 22% year on year, higher than Bloomberg's agreed expectations, stemming from improvements in Baidu's core and iQiyi operating efficiency and gradual confirmation of AI investment, operating profit margins are still improving. By business, (1) Baidu's core online marketing: The 3% year-on-year increase in revenue in 2024Q1 was weaker than the Internet advertising market. According to QuestMobile data, the 2024Q1 Internet advertising market in China increased 4.6% year over year, due to the impact of the macro environment and the fact that AI-generated content in searches has not yet begun to be monetized. About 11% of the 2024Q1 search pages are AI-generated results. (2) AI and intelligent cloud: The share of AI demand increased, and MaaS platform tools were launched. 2024Q1 AI demand increased by about 6.9%, an increase of 2.1 pcts over the previous month.
(3) Intelligent driving: The number of orders for the 2024Q1 Radish Fast Run increased 25% year over year. (4) iQiyi: Revenue fell 5% year on year, and non-GAAP net interest rate was 10.6%.
The growth rate of the advertising business is constrained by the macro environment. Operational efficiency improvements ensure stable profit margins. Growth is pressured by macroeconomic factors. The offline economy and SME customer marketing demand is weak, and medium- to long-term AI drives the improvement in advertising monetization efficiency and the increase in cloud demand. On the revenue side, the advertising business is affected or pressured by macroeconomic factors, but AI is driving an increase in ad conversion rates, and the increase in advertising and cloud revenue created by AI is expected to reach several billion yuan for the whole year 2024. On the profit side, although AI investment is gradually confirmed as monetization accelerates, the company focuses on AI strategies to reduce non-core business investment and cost optimization, and profit margins are expected to remain stable.
Risk warning: The macroeconomy falls short of expectations, AI progress falls short of expectations, and the monetization of intelligent driving falls short of expectations.