2Q non-standard net profit exceeds market expectations by 11%
The company announced 2Q24 results: the company's revenue remained basically flat at 33.9 billion yuan, slightly lower than market expectations; Baidu's core revenue also increased 1% to 26.7 billion yuan, slightly higher than market expectations. Non-common standard net profit of 7.4 billion yuan (non-standard net profit margin 22%), exceeding market expectations by 11%, mainly due to good cost control. Baidu's core non-standard operating profit margin increased 1.5ppt to 26% year-on-year.
Development trends
Macro, competition, and AI search transformation are all putting pressure on 2H advertising. Baidu's core advertising revenue fell 2% in 2Q. This is due to pressure on offline advertising recovery and the negative impact of AI transformation on commercialization. 2Q's generative AI search results accounted for 18% (11% in mid-May), and the average daily distribution of AI agents in July doubled to 8 million compared to May. The company expects an improvement in user retention and engagement, and an increase in conversion rates on the commercial side, driving 2Q AI-related advertising revenue to continue to grow month-on-month. Therefore, the company plans to continue to actively promote AI transformation in 3Q. Considering that AI monetization is under pressure in the short term, we expect 3Q advertising revenue to drop 4% year over year. Considering the increase in demand for generative AI computing power costs and the increase in the share of low-margin businesses, we expect Baidu's core operating profit margin to be under pressure year over year.
3Q Cloud revenue growth is expected to accelerate, and profit margins continue to be optimized. 2Q AI cloud revenue also increased 14%, and profit margins were optimized, mainly due to AI-related revenue support and GPU cloud cross-selling, which increased the growth rate of traditional clouds. 2Q AI contributed 9% to cloud revenue (up about 2ppt from month to month), and the company expanded the supply of diversified models (Wenxin Big Model 4.0 Turbo released in June), and implemented a drastic price reduction to expand the call scale. Currently, the average daily API call volume has exceeded 0.6 billion (1Q is 0.2 billion), the average daily tokens have reached 1 percent, and AI native applications produced through its AI suite have reached more than 100,000. Considering the increase in AI cloud contributions and the steady growth of traditional clouds, we expect 3Q cloud revenue growth to accelerate to 15%, and AI cloud profit margins are expected to continue to be optimized.
The operating efficiency of Wuhan Radish Express continues to improve. The number of 2Q Radish Express orders also increased 26% to 0.899 million. The company began to provide 100% fully unmanned autonomous driving operations in Wuhan close to the entire city, and the 2Q Radish Express Wuhan site size increased 3 times over the previous month. The company expects 2Q bike costs to drop by more than half year on year, and the low-cost RT6 has begun large-scale testing. We expect single-zone UE to continue to be optimized as RT6's penetration rate in the fleet increases.
Profit forecasting and valuation
Considering the pressure on iQiyi's revenue and profit, we lowered our 2024 and 2025 revenue forecasts by 3% and 4% to 133.4 and 138.7 billion yuan, and by 3% and 5% of non-general standard net profit for 2024 and 2025 to 270 and 29.6 billion yuan. Maintaining an outperforming industry rating, lowering the target prices of US stocks and Hong Kong stocks by 16.4% and 16.5% to HK$116.0 and HK$112.3. Based on the SOTP valuation method (lowering the P/E multiplier for Baidu Core Advertisements from 10x to 8x), the 2024/2025 non-standard price-earnings ratio of US stocks and Hong Kong stocks is 11 times/10 times, respectively. Compared with the current US stocks and Hong Kong stocks, there is 29% and 30% upward space compared to current US stocks and Hong Kong stocks, respectively (current US stocks correspond to 8.2 times/7.5 times 2024/2025 non-standard price-earnings ratio for 2024/2025) Corresponds to 8.1 times/7.4 times the 2024/2025 non-standard price-earnings ratio).
risks
New business expansion falls short of expectations, cost reduction and efficiency fall short of expectations, regulatory risks