Baidu: Moat Downgraded to None from Wide; AI Segment Growth to Offset Search Decline In Long Run

"Chinese users increasingly search within Little Red Book, social networking, short video, and AI chatbot apps. Peak daily active users during the Spring Festivals were 145 million for Doubao, 74 million for Qianwen, and 41 million for Yuanbao, according to Questmobile. Compared with Douyin, Alibaba, and Tencent, Baidu has a weaker ecosystem and fewer resources with which to compete in AI chatbots."

"We downgraded Baidu's moat to none from wide as its search business lost its moat. We cut our valuation by 12% to $128 per share, as lower earnings were partly offset by a lower WACC of 9.7% from 10.5%. We think the shares are undervalued, as the market has not fully priced in the earnings potential of Baidu's AI-powered businesses."

"We forecast net margin expansion to 10% in 2030 from 4% in 2025, as AI-powered businesses scale and gain operating leverage amid strong AI demand. We assume a negative 11% CAGR in non-AI general business revenue during 2026-30, largely offset by a 23% CAGR in AI-powered businesses."

Baidu's non-AI general business revenue declined 20% year-over-year in Q4, driven by search weakness as Chinese users increasingly shift to Little Red Book, short video apps, and AI chatbots. The company's moat was downgraded from wide to none due to lost search dominance. While Baidu's AI enterprise cloud and Kunlunxin GPU business show promise, they lack sufficient scale for moat assignment. The valuation was reduced 12% to $128 per share, offset partially by lower weighted average cost of capital. Management projects negative 11% revenue decline in non-AI businesses through 2030, counterbalanced by 23% AI business growth and 27% net income CAGR, with net margins expanding to 10% by 2030.

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