Performance outlook: We expect Baidu Group's total revenue in 24Q2 to drop 0.8% year on year to 33.8 billion yuan, and Baidu's total core revenue to drop 0.8% year on year to 26.2 billion yuan. We expect Baidu Group's 24Q2 core non-GAAP operating profit of 6.3 billion yuan, a year-on-year decrease of 4.9%, corresponding to an operating profit margin of 24.0%; Baidu Group's 24Q2 non-GAAP net profit of 7.17 billion yuan, corresponding to a net profit of 21.2%.
1. Online marketing business: Q2 The advertising business is under pressure, and generative AI may be a new opportunity in the future. We expect Baidu's core revenue for 24Q2 to be 26.2 billion yuan, a year-on-year decrease of 0.8%. Among them, online marketing services fell 4% year over year to 18.82 billion yuan. The decline in advertising was mainly due to: 1) a high base in the same period last year (14.6% year-on-year growth rate in 23Q2); 2) the relatively weak macroeconomic environment had an impact on the marketing budgets of small and medium-sized advertisers; 3) generative AI supports product transformation, continuously improves user experience, helps advertisers change from CPC to CPS, and enhances long-term monetization prospects, but the short-term positive impact on commercialization is still relatively small.
2. Non-online marketing business: Generative AI optimizes the profit margin of cloud business, and Xiaodu is expected to remain in the adjustment period. We expect Baidu's core non-online marketing revenue to be 7.379 billion yuan in 24Q2, an increase of 8.5% over the previous year.
Among them, it is expected to be mainly contributed by Baidu's intelligent cloud business. The share of generative AI in AI Cloud is expected to continue to increase, and profit margins are superior to traditional cloud businesses. Xiaodu is in an adjustment period, and overall revenue is expected to be stable.
3. The AI business is expected to be in a good state of development. 1) The number of users of the 24M6 Wenxin large model has exceeded 0.3 billion, with a maximum of 0.5 billion daily calls, which is significantly higher than the number of 0.2 billion 24M4 users and the average daily API call volume of 200 million.
Affected by peer price cuts, Baidu reduced the price of its models, which is expected to drive the number of users and API calls to continue to increase in the future; in addition, the large model's capabilities are also continuously iteratively improving, and the training efficiency is 5.1 times higher. The average weekly training efficiency rate is 98.8%, and the inference performance has increased 105 times, and the inference cost is only 1% of the original. 2) Baidu continues to improve the underlying ecosystem of AI applications. For example, 23M6 released Wenxin Express Code 2.5, which empowers the entire R&D process and enhances enterprise-level security, and the Flying Propeller Framework 3.0, which unifies and automatically parallels motion and static, and integrates large-scale model training and promotion. The Propeller Ecosystem Platform has served 14.65 million developers and 0.37 million companies, and built over 0.95 million models. Baidu's promotion of AI-related businesses is expected to continue to increase in related revenue.
4. The Apollo Go layout has a clear leading strategy, and it is recommended to continue to pay attention to the progress of the intelligent driving business. Apollo Go24Q1 already operates in 10 cities, has a quarterly order volume of 0.83 million, and has a good first-mover advantage. 24Q2 is expected to achieve a breakthrough in UE balance goals in Wuhan: 1) the fully unmanned rate is expected to be close to 100%, significantly reducing labor costs; 2) it is planned to deploy 1,000 RT6 units as soon as possible (cost 0.2046 million yuan) to effectively reduce operating costs. After achieving a balance of unit economic benefits in Wuhan, increasing order volume and reducing vehicle operating costs are core factors for successful replication in other regions, and Baidu is also making steady progress by optimizing operation management and developing new models. We expect that with the increase in the proportion of fully driverless cars and operational efficiency, Apollo Go is expected to first achieve profit in Wuhan in the future, and fully enter the profit period in 2025.
Profit forecasting, valuation and ratings: Considering that the company is expected to maintain investment in cutting-edge technologies such as AI and autonomous driving, the 24Q2 advertising business is under phased pressure, and it will take time for advertisers' demand to recover. At the same time, we slightly adjusted the 2024-26 non-GAAP net profit forecast to 28.4/29.6/31.2 billion yuan (-0.1%/-0.3% compared to the previous forecast). Considering that the Radish Express business is progressing smoothly and receiving market attention, the AI business is expected to show a healthy growth state. The positive effect on the valuation is expected to be reflected in the following quarter, giving the company a 24-year valuation of 12.0x PE/4.5x PS/4.5x PS for advertising/smart cloud/ other businesses, maintaining a target price of HK$165 and maintaining a “buy” rating.
Risk warning: Internet industry regulatory risk, advertising demand falling short of expected risk, AI upgrading various businesses less than expected risk, competition intensifies risk