(Bloomberg) — Baidu shares have fallen since October 2022 after reporting a 48% plunge in profits, highlighting rising costs of training and developing AI to fend off challengers in the fast-growing field. This was a significant decline.
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The company reported a lower-than-expected net profit of 2.6 billion yuan ($361 million) for the December quarter, mostly due to capital accounting losses on preferred stock. Baidu's ChatGPT-style service started to boost ad sales, overshadowing a 6% revenue increase after helping China's AI leader survive a deep economic downturn. The company's stock price fell more than 8% in New York.
Baidu's results follow disappointing numbers from Alibaba Group Holding Ltd., and highlight how much momentum the private sector that once drove the world's second-largest economy is losing momentum. The mixed results underscored the challenges facing the company, which once routinely posted double-digit growth rates but is now grappling with macroeconomic and market uncertainty.
To reignite its business, Baidu is joining Silicon Valley peers from Microsoft Corp. to Google in exploring ways to monetize generated AI. The Chinese company has attracted more than 100 million users to its ChatGPT-style service, which now also includes a premium tier that charges a monthly subscription, and is similar to Tencent Holdings and Byte. It has a head start against its peers in dance and other industries.
But the revenue generated by the AI ​​model known as Arnie is negligible for Baidu, which still relies primarily on search ads. Billionaire founder Robin Li told analysts on a conference call that Arnie will contribute “several billions of yuan” of additional revenue through advertising and cloud services in 2024, which is up from the December quarter. He said the amount will increase from several hundred million yuan. Revenue from Baidu's central cloud division rose 11% to 5.7 billion yuan in the quarter, executives said.
Still, research and development costs rose 11% last quarter, reflecting the cost of servers supporting generative AI development. In this regard, Li said Baidu needs to have enough high-end training chips to support Arnie's progress over the next one to two years.
The founder has previously warned against China's so-called “100 Model War.” In this war, big tech companies and venture capitalists alike are pouring billions of dollars into startups building AI platforms from scratch, many using the same open source code. Instead, Baidu is offering local developers to create AI-native applications on Ernie, and he has committed $140 million to fund such projects. ing.
If successful, Arnie could put Baidu at the core of an AI ecosystem similar to the GPT store to OpenAI. But long-time rivals Tencent and Alibaba are also competing for a market that is likely to be winner-take-all, with both companies commanding larger armies and user pools thanks to super apps like WeChat and Taobao. ing.
Bloomberg intelligence statement
Baidu's fourth-quarter profit beat expectations due to improved cost management, but AI-related losses widened, highlighting continued growth challenges. Baidu Core's adjusted profit decreased by 7.1% sequentially, and despite the increased sales contribution from ERNIE-Bot, the margin decreased by 260 bp to 22.5%. The decline in profit margins suggests that ERNIE-Bot is still not profitable, even though 'other sales' are increasing by 4.7% per year.
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In the short term, Baidu still relies on advertising as its bread and butter, but that doesn't bode well during an economic downturn. The world's second-largest economy is suffering from a real estate recession and deflation, forcing Chinese leaders to resort to a wide range of policies, including interest rate cuts and direct capital injections, to boost investor confidence.
Revenue from Baidu's core businesses, including online marketing and cloud, met analysts' expectations in the December quarter. His IQiyi Inc., the company's streaming arm, saw little revenue growth as it lost some paid subscribers, but profitability continued to improve.
Baidu, once the undisputed leader in desktop search, has been trying to adapt its business to the mobile age for years, with mixed success. In January, the Beijing-based company canceled a $3.6 billion deal to acquire Joyy Inc.'s streaming service YY, citing a lack of regulatory approval.
The company's stock price has fallen about 30% since July in Hong Kong, underperforming its peers as high AI development costs compound investors' concerns about the economic downturn.
Read more: Alibaba's new CEO makes AI a top priority in shakeup
–With assistance from Debby Wu.
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