Executive Summary / Key Takeaways

• Baidu is undergoing a profound AI-first transformation, leveraging its full-stack AI capabilities to revolutionize its core businesses, including Search, AI Cloud, and Autonomous Driving, positioning itself for significant long-term value creation.
• The AI Cloud segment and Apollo Go autonomous driving service are demonstrating robust growth and improving operational efficiency, helping to offset near-term pressures in the online marketing business.
• Technological leadership in ERNIE foundation models, characterized by rapid iteration, multimodal capabilities, and cost-effectiveness, alongside the purpose-built RT6 autonomous vehicle, provides a significant competitive moat.
• Despite acknowledging short-term revenue and margin pressures due to heavy AI investments and the early stages of AI search monetization, management is committed to an application-driven approach, expecting gradual improvements in profitability over the long term.
• Strategic partnerships and global expansion initiatives are critical to scaling Baidu's AI applications and autonomous driving services, particularly in higher-fare international markets.

The AI Imperative and Baidu's Vision

Baidu, Inc., incorporated in 2000 and a public company since 2005, stands at the forefront of China's digital economy, undergoing a profound transformation into an AI-first powerhouse. The company's overarching strategy is rooted in a long-standing belief in technology and innovation, with a particular emphasis on leveraging artificial intelligence to fundamentally reshape its core businesses. This strategic pivot is a direct response to the unprecedented pace of technological advancement in AI, which is creating new solutions and driving a shift towards AI-centric computing across industries. Baidu's foundational strength lies in its unique full-stack AI capabilities, spanning infrastructure, framework, models, and applications, which it views as a core competitive advantage.

The company's journey into AI began over a decade ago with investments in autonomous driving and more than two years prior to Q2 2025 with the launch of its ERNIE foundation model. This commitment accelerated significantly in 2023 with the introduction of ERNIE Bot in March and ERNIE 4.0 in October, marking a pivotal year for GenAI. This rapid evolution has positioned Baidu as a specialized player in content and AI-driven ecosystems, contrasting with competitors like Alibaba (BABA), which excels in integrated e-commerce, or Tencent (TCEHY), dominant in social media and gaming. While Baidu's focus on AI innovation gives it a unique value proposition in emerging tech, it operates in a highly competitive landscape where multiple models coexist, and value creation is increasingly shifting to the application level.

Technological Bedrock: ERNIE and Full-Stack AI

Baidu's technological differentiation is anchored by its ERNIE foundation models and its unique four-layer end-to-end AI architecture. This architecture is a core competitive advantage, driving healthy growth in the AI Cloud business and enabling end-to-end optimization that enhances both performance and efficiency across all layers.

The ERNIE series of foundation models are central to Baidu's AI strategy, adopting an application-driven approach to innovation. This means model development is strategically focused on areas with real-world application value, such as the AI transformation of Baidu Search and industry-leading digital human technology. The benefits of this technology are tangible and, in many cases, quantifiable. For instance, ERNIE 4.0 Turbo achieved a notable 48% increase in inference efficiency throughput compared to its predecessor in June 2024, driven by optimizations within Baidu's self-developed AI infrastructure. In the first quarter of 2025, ERNIE X1 matched DeepSeek R1's performance at half the price, while ERNIE 4.5 Turbo was priced 80% lower than ERNIE 4.1, and ERNIE X1 Turbo at half the price of ERNIE X1, demonstrating significant cost reductions. These price cuts are supported by Baidu's full-stack AI capabilities, making its models among the most cost-effective options in the market.

R&D initiatives are continuously pushing the boundaries of ERNIE's capabilities. In March 2025, Baidu released ERNIE 4.5, its first flagship model with multimodal capabilities, and ERNIE X1, its first reasoning model with advanced function calling. Upgraded Turbo versions were unveiled in April 2025, featuring enhanced performance and dramatically lower pricing. The company also plans to open source its ERNIE 4.5 series models by June 30, 2025, a strategic move to expand market awareness and drive broader adoption. Beyond core models, Baidu launched ERNIE iRAG in Q3 2024 to mitigate hallucinations in text-to-image generation, delivering more precise and demand-driven results. New technologies like Miaoda, a no-code platform, have enabled users to create approximately 200,000 applications by July 2025 through natural language conversations with AI. Internally, Comate, an AI coding assistant, contributed to generating over 45% of new code in July 2025, significantly boosting R&D efficiency.

For investors, these technological advancements are critical. They contribute to Baidu's competitive moat by offering superior performance and cost-efficiency, which can translate into higher adoption rates, improved margins, and a stronger market position. The ability to continuously lower inference costs and enhance model capabilities ensures Baidu remains a front-runner in the rapidly evolving AI landscape, attracting more cloud customers and solidifying its market leadership.

Transforming Core Businesses: Search, Cloud, and Mobility

Baidu's AI-first strategy is fundamentally transforming its key business segments, driving operational achievements and shaping financial performance.

AI-Powered Search: A Fundamental Revolution

Baidu is fundamentally revolutionizing the search experience, moving beyond simply inserting AI summaries into results. Instead, it is replacing static structural hyperlinks with intelligent, structured, and multi-modal AI-generated responses. This approach contrasts with traditional search engines and even other AI chatbots, positioning Baidu Search as an integrated platform that goes beyond providing smart answers to guiding users through task completion and service delivery.

The AI transformation of search is accelerating rapidly. By the end of June 2025, AI-generated content reached over 50% of mobile search result pages, up from 35% in April 2025, and further to 64% by July 2025. This transformation reached over 90% of Baidu App's monthly active users (MAUs) in July 2025. User metrics show sustained improvements, with Baidu App's MAU reaching 735 million in June 2025, a 5% year-over-year growth, and daily average time spent per user increasing by 4% year-over-year in Q2 2025. Users exposed to AI-generated search results demonstrate higher engagement, more complicated queries, and stronger retention. While large-scale monetization of AI search is still in its early stages and is expected to weigh on near-term revenue and margins, management believes the long-term upside is substantial, as AI search can monetize previously difficult-to-monetize queries and create more flexible, native ad formats. In Q2 2025, revenue generated by agents for advertisers grew 50% quarter-over-quarter, contributing 13% of Baidu Core's online marketing revenue, while digital humans contributed 3% of online marketing revenue, growing 55% quarter-over-quarter.

AI Cloud: The Engine of Enterprise Transformation

Baidu AI Cloud is a significant growth driver, leveraging the company's full-stack AI capabilities to offer highly cost-effective end-to-end AI cloud products and solutions. This segment's revenue reached RMB 6.5 billion in Q2 2025, a 27% year-over-year increase, with non-GAAP operating profit achieving year-over-year growth and maintaining a healthy margin. For the first half of 2025, AI Cloud revenue increased 34% year-over-year, accelerating from low teens growth in the first half of 2024. Subscription-based revenue, which accounts for more than half of the enterprise cloud's total, grew steadily, with subscription-based AI infrastructure growing over 50% year-over-year in Q2 2025.

Baidu's AI Cloud differentiates itself by its ability to deliver superior performance at lower costs, reinforcing its position as a top-tier cloud provider in the AI era. A critical system engineering breakthrough in Q2 2025, the large-scale stable deployment of prefiled detailed separation architecture, significantly improved inference concurrency, resource utilization, and reduced inference costs. The company achieved over 90% utilization rates for key tasks in large-scale GPU clusters. Qianfan, Baidu's MaaS platform, features a comprehensive model library, including the newly open-sourced ERNIE 4.5 series and third-party multi-model models, and offers industry-leading tool chains for model development. This competitive edge is particularly relevant in China's cloud market, which is rapidly shifting towards AI-centric computing, with demand picking up across diverse sectors like utilities, financial services, and embodied AI.

Apollo Go: Driving the Future of Autonomous Mobility

Autonomous driving is another critical frontier for Baidu's AI applications. Apollo Go, Baidu's autonomous ride-hailing service, is a global leader in this space, combining industry-leading technology, extensive operational experience, and an extraordinary safety record. In Q2 2025, Apollo Go provided over 2.2 million fully driverless rides to the public, a remarkable 148% year-over-year increase, marking its strongest quarterly growth in two years. Cumulative rides surpassed 14 million as of August 2025, with a global footprint spanning 16 cities as of June 2025, and fleets accumulating over 200 million autonomous kilometers.

Apollo Go's competitive differentiation is multifaceted. Its RT6, the world's first and only mass-produced Level 4 autonomous vehicle, boasts the lowest unit cost globally (below $30,000). The service has achieved positive unit economics in China, even in markets where ride fares are significantly lower than in major overseas markets, demonstrating unmatched operational excellence and cost efficiency. This strong foundation is enabling rapid global expansion through strategic partnerships. In July 2025, Baidu announced a multiyear partnership with Uber (UBER), followed by Lyft (LYFT) in August 2025, to deploy thousands of Apollo Go's fully autonomous vehicles in international markets across Asia, the Middle East, and Europe. Apollo Go also leads the world in the right-hand drive robotaxi market, with rapid progress in Hong Kong and open road testing in Dubai and Abu Dhabi. These partnerships and operational achievements position Apollo Go to capture greater value in higher-fare markets while scaling efficiently through an asset-light business model.

Financial Performance and Strategic Investments

Baidu's financial performance in recent quarters reflects its strategic pivot towards AI, with strong growth in AI-driven segments offsetting pressures in traditional online marketing. In Q2 2025, Baidu Core's total revenue was RMB 26.3 billion, a 2% decrease year-over-year, while total revenues were RMB 22.7 billion, down 4% year-over-year. This was primarily due to a 15% year-over-year decrease in Baidu Core's online marketing revenue to RMB 16.2 billion. However, Baidu Core's non-online marketing revenue, primarily driven by AI Cloud, surged 34% year-over-year to RMB 10 billion, exceeding this threshold for the first time and helping to offset the online marketing headwinds.

Profitability metrics show a mixed picture. Baidu Core's non-GAAP operating margin was 17% in Q2 2025. While AI Cloud achieved year-over-year growth in non-GAAP operating profit and maintained a healthy margin in Q2 2025, its non-GAAP operating margin was in the teens in Q1 2025. The cost of revenue increased 12% year-over-year in Q2 2025, mainly due to higher costs related to the AI Cloud business and content. Operating expenses decreased 4% year-over-year, primarily due to lower personnel-related expenses, partially offset by increased channel spending. R&D expenses for Baidu Core decreased 14% year-over-year in Q2 2025, accounting for 18% of revenue, down from 20% in the prior year.

Liquidity remains robust, with cash, cash equivalents, restricted cash, and short-term investments totaling RMB 124.2 billion as of June 30, 2025.

The net cash position for Baidu was RMB 155.1 billion at the same date. However, free cash flow was negative RMB 4.7 billion in Q2 2025, primarily due to increased investment in the AI business. The company also completed a CNY4.4 billion offering of CNY-denominated Senior Notes on September 15, 2025, for general corporate purposes, including debt repayment. Baidu is committed to increasing AI investments in 2025 to solidify its AI foundation and prepare for future growth, while also accelerating its share repurchase program, having repurchased $445 million in Q1 2025 and over $1 billion since the beginning of 2024.

Outlook and Risks: A Path to Long-Term Value

Baidu's management acknowledges that the AI transformation, particularly in search, is still in its early stages for large-scale monetization, which will inevitably put significant pressure on near-term revenue and margins, with Q3 2025 expected to be especially challenging. However, the company maintains a strong conviction in its strategic direction, believing it is the right path for long-term growth.

The outlook for Baidu's AI Cloud business remains strong, with expectations for continued robust revenue growth and positive operating profit in 2025. This is driven by accelerating AI adoption, improving foundation model performance, and declining inference costs, which are expanding the total addressable market. For Apollo Go, management anticipates accelerating growth in ride volumes, with the global operational fleet size multiplying, and expects faster expansion in 2025 and beyond. The company plans to launch the next flagship version of ERNIE with significant improvements in the second half of 2025, and a new version early next year, further strengthening its leadership in foundation models.

Key risks include the ongoing macroeconomic weakness, which continues to impact advertising demand, particularly from small and medium enterprises. The intensifying market competition in the foundation model and cloud spaces also presents challenges. Furthermore, U.S. export restrictions on advanced AI chips are a consideration, though Baidu is building a flexible AI architecture that maximizes GPU utilization and supports a variety of chips, including domestic ones, to mitigate this. The wider deployment of autonomous driving technology also depends on the evolution of a harmonized regulatory framework. Despite these challenges, Baidu's strategic focus on an application-driven approach to AI innovation, coupled with disciplined execution and a commitment to shareholder returns, is expected to support a gradual recovery in profitability over time.

Conclusion

Baidu's journey is a compelling narrative of a technology giant undergoing a fundamental AI-first transformation. By strategically investing in its ERNIE foundation models, leveraging its unique full-stack AI architecture, and aggressively pursuing AI-driven revolutions in Search, AI Cloud, and Autonomous Driving, Baidu is laying the groundwork for substantial long-term value creation. While the company faces near-term headwinds from macroeconomic pressures and the early monetization phase of its AI initiatives, its technological leadership, demonstrated by cost-effective and high-performing AI models and autonomous vehicles, provides a robust competitive advantage.

The commitment to an application-driven approach ensures that Baidu's AI innovations translate into tangible benefits for users and enterprises, driving adoption and expanding market opportunities. Strategic partnerships and global expansion efforts are poised to accelerate growth in its high-potential segments. As the AI landscape continues to evolve, Baidu's disciplined execution and unwavering focus on technological differentiation position it to emerge as a dominant force, reshaping industries and delivering sustainable growth for investors in the years to come.