Baidu's core revenue is predicted to drop slightly year-on-year

In 2Q24, we expect Baidu's overall revenue to drop slightly to 33.7 billion yuan year on year; of these, Baidu's core revenue will drop slightly to 26.2 billion yuan year on year. We expect 2Q24's non-GM net profit of 6.3 billion yuan, of which Baidu's core non-GM net profit is 6 billion yuan.

Key points of interest

Radish runs at a rapid pace. According to the 1Q24 financial report, the company's national order volume reached 0.83 million orders in a single quarter, with Wuhan accounting for the largest share of orders, and the service scale increased 8 times over the same period last year. The company expects single-zone UE to continue to be optimized, mainly due to: 1) Vehicles: The company has launched about 300 unmanned vehicles by the end of the year, and RT6 is expected to replace existing vehicles. The company expects hardware depreciation costs to be reduced; 2) People: As of April, the unmanned rate of Wuhan Radish Express is close to 70%. The ratio is optimized, and there is still room for reduction in driver costs.

2Q24 advertising revenue is under pressure, and the AI cloud growth rate is basically in line with expectations. 1) Advertising: The company expects AI advertising transformation (extreme satisfaction, stimulating recommendations, multiple rounds of interaction, etc.) to be effective, and user retention and participation rates will increase; considering the base effect, the recovery pressure of offline advertisers, and the negative impact of AI search transformation on commercialization, we lowered the 2Q Baidu core advertising growth forecast to a 3% year-on-year decrease, and the company expects advertising to be weak or continue until 3Q; 2) Cloud: Considering the weakening of the negative impact of ACE's revenue base and the continued increase in AI's revenue contribution, we maintain the company's judgment of 14% year-on-year increase in 2Q Baidu Cloud's revenue Expected Currently, model training and GPU cloud revenue are relatively high, but API calls are gradually starting to increase; in addition, the trend of price reduction for large models in the industry continues, and the company expects price adjustments to mainly target lightweight models, and the revenue growth of the main model is also quite impressive. Looking ahead to the whole year, we expect Baidu marketing's core advertising revenue to decline year over year, and we maintain our expectations for a double-digit year-on-year increase in cloud revenue.

We expect profit margins to remain essentially flat in 2Q24. Considering that high-profit advertising revenue is lower than expected, but the company continues to reduce costs and increase efficiency, we expect Baidu Core's adjusted operating profit margin in 2Q to be basically flat year over year.

Profit forecasting and valuation

Considering the pressure on advertising revenue, we lowered our 24-year and 25-year revenue forecasts by 2% and 2% to $137.0 and 144.1 billion, maintained our non-generic standard net profit forecast for 24 and 25, and maintained our outperforming industry ratings. Considering the downgrade of the 24-year profit forecast for core advertising, we lowered the target prices of US and Hong Kong stocks by 8.4% and 8.4% to $138.8 and HK$134.5 based on the SOTP valuation method, corresponding to 12 times/11 times Hong Kong stocks for 2024/2025, respectively The general standard price-earnings ratio is 40.1% and 43.2% of the current US stocks and Hong Kong stocks, respectively (current US stocks correspond to 8.8 times/7.8 times the 24/25 non-standard price-earnings ratio, and Hong Kong stocks correspond to 8.6 times/7.6 times the 24/25 non-standard price-earnings ratio).

risks

New business expansion fell short of expectations, cost reduction and efficiency fell short of expectations, and regulatory risks.