[Incident] The company released 24Q2 earnings report, achieving revenue of 33.93 billion yuan (yoy -0.4%), slightly lower than Bloomberg's agreed estimate of 34.11 billion yuan; adjusted net profit of 7.4 billion yuan, higher than Bloomberg's agreed estimate of 6.68 billion yuan. The non-gaap margin was 21.8%, and profit growth exceeded market expectations.
Core advertising continues to be under pressure, and the cloud business is growing strongly. 24Q2 Baidu's revenue was 33.93 billion yuan (yoy -0.4%), Baidu core achieved revenue of 26.69 billion yuan (yoy +1.1%, Bloomberg's agreed forecast was yoy +0.2%), of which advertising and marketing revenue was 19.2 billion yuan (yoy -2.0%, better than Bloomberg YOY -2.9% expectations), and non-marketing revenue of 7.49 billion yuan (yoy +10%), mainly driven by the smart cloud business. Baidu Cloud business revenue increased 14% to 5.1 year on year Billions of yuan, benefiting from a significant increase in the usage of one-stop enterprise-level large-scale model platforms. AI contributed about 9% of revenue to the intelligent cloud business (6.9% in 24Q1).
Cost-side controls are excellent, and profit margins exceed expectations. 24Q2 Baidu's core gross margin was 59.2% (yoy-0.8pct).
The sales and management cost ratio yoy-2.4pct was 17.8%, and the R&D expense ratio yoy-2.1pct was 20.4%. Taken together, Baidu's core OPM reached 21.0% in 24Q2, and adjusted OPM was 26.2% (yoy+1.6pct, qoq+2.8pct; Bloomberg's agreed expectation was 23.1%).
The big AI model is restructuring Baidu's business, and commercialization is advancing at an accelerated pace. (1) Application and user side: In June, the company launched Wenxin 4.0 Turbo to further expand the Wenxin series model and improve operation speed and cost efficiency. As of June '24, Baidu's MAU reached 0.703 billion (yoy +4%); (2) AI big model: Currently, Wenxin's big model has been called more than 0.6 billion times per day, processing more than 1 token text per day, and has increased more than 10 times in the past six months. At the same time, the big model restructured Baidu's core search and advertising business. In 24Q2, 18% of search results were already generated by AI.
The number of orders for the Intelligent Driving Radish Run service is growing rapidly. 24Q2 Radish Express's autonomous driving orders reached about 899 thousand orders (yoy +26%). As of July 28, 2024, the total number of autonomous driving travel service orders provided has exceeded 7 million orders.
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Considering that the company's advertising business is adversely affected by macroeconomics, we expect the company's adjusted net profit to be 27.4/29.2/30.3 billion yuan (original forecast value 26/30.5 billion yuan for 24-25), selecting leading domestic and foreign Internet and artificial intelligence-related companies. The adjusted PE for 24 years was 12x, corresponding to the company's market capitalization of $338.7 billion, HKD 0.91 against RMB, and a target price of HK$132.37, maintaining a “buy” rating.
Risk warning
AI commercialization falls short of expectations, advertising industry recovery falls short of expectations, R&D costs are too high and output is limited