Can the new Baidu, aspiring to AI, successfully shed its old advertising label?

$Baidu(BIDU.US) Third quarter results were released after the Hong Kong stock market closed on November 18, 2025, and overall met expectations. Through detailed disclosure of AI revenue, it is evident that the company is eager to shed its traditional label and fully embrace the new AI narrative.

Specifically (focusing only on Baidu Core) :

1. AI revenue contribution has reached 40%: In the third quarter, revenue directly related to AI reached nearly 10 billion, accounting for 40% of total revenue. Among them:

(1) AI cloud infrastructure (including large model APIs, computing power leasing) accounted for half, with a year-on-year growth rate of 33%. Since the AI part has been singled out, this growth rate is not particularly impressive. The significant change is in computing power leasing, with a growth rate of 128% this quarter, accelerating compared to last quarter's 50%. Dolphin Research believes this is partly due to increased AI penetration in the industry, especially the transformation needs of small and medium-sized enterprises and downstream application parties; it may also include demand contributed by some giants who previously supplied their own computing power.

According to management's explanation during the conference call, if the latter exists, future demand may migrate back, and if industry penetration does not continue to deepen, this quarter's acceleration may be more of a one-time occurrence for Baidu.

(2) AI applications reached 2.6 billion, with a year-on-year growth rate of 6%, mainly including Baidu Library, Baidu Netdisk, digital employees, etc. Although also under AI+, the growth rate is relatively low, which Dolphin Research estimates is mainly due to the drag from Baidu Netdisk (promotional discounts this quarter) and other miscellaneous items. However, the potential impact of competition cannot be ignored, such as recent enhancements in features or services by Quark and WeChat Netdisk.

(3) AI native marketing services, mainly referring to agents and digital humans, achieved 2.8 billion in the third quarter, with a growth rate of 262%, clearly in a period of strong development, and the application prospects are more valuable.

2. User attrition, advertising pressure remains significant: Q3 overall marketing revenue declined by 18%, slightly better than guidance. However, excluding the AI part, traditional advertising implicitly declined by 27% year-on-year. The company mainly attributed this to the impact of AI-generated content, revealing that 70% of mobile search results in the third quarter contained AI-generated content, reaching a certain stage of penetration.

But the nearly 30% decline may still be influenced by competition, i.e., traffic migrating to peer ecosystems (search within other applications, native AI applications), such as Tencent's advertising growth rate of 21% in the third quarter, with significant contributions from WeChat Search.

From user numbers, the problem is also evident, with Baidu App MAU decreasing by 27 million users quarter-on-quarter, although slightly better than the same period last year, the positive effect of improved product experience through AI search integration since the beginning of the year is weakening, indirectly indicating some signs of traffic migration.

3. Robotaxi is "running fast" internationally: In other revenue, besides the cloud, smart driving is a highlight. Q3 Robotaxi orders reached 3.1 million, with a growth rate of 212%, significantly accelerating compared to Q2. Besides penetration in 22 cities in mainland China, Robotaxi has mainly advanced in international markets such as Hong Kong, Dubai, and Switzerland this year.

4. Core profit margin pressure released: Baidu Core's main business operating profit, i.e., gross profit minus three operating expenses, fell to 1.2 billion in Q3, with a profit margin of only 5%, far below normal levels. This is related to several factors: 1) Business structure changes. AI business revenue has increased, but the profit margin is very low, thus dragging down the overall level. 2) Q3 marketing expenses increased significantly, possibly related to the promotion of cloud and AI applications, including the establishment of sales teams and promotional expenses.

Additionally, a one-time provision of 16.2 billion was made this quarter, mainly for the impairment of some traditional equipment. This provision does not affect cash flow but will optimize future costs, representing pressure released in advance.

5. Capital expenditure slightly expanded: Baidu's Capex is significantly lower than peers, partly due to years of AI investment accumulation, and partly because of self-developed chips, which are cheaper than external procurement. However, the cost demand for AI is significantly higher, and Baidu's Capex has already restarted expansion since last quarter.

In the third quarter, Baidu's capital expenditure was 3.4 billion, with a year-on-year growth rate of 106%, which corresponds to the aforementioned action of eliminating traditional equipment. As old equipment is eliminated, new server-related expenditures need to increase. Considering Baidu also has the Kunlun chip business, the expansion of capital expenditure may not be for external GPU procurement but possibly related to supporting facilities for Kunlun chips.

6. Increased shareholder returns on the way?: Although it is difficult to predict when the advertising business will improve, the market has always had mixed feelings but also expectations for the huge cash distribution on Baidu's books (as of the end of Q3, Baidu Core's net cash was 103.5 billion, equivalent to 14.8 billion USD). After all, the current return rate is not high, and Q3 buybacks may be better than nothing, but the financial report did not disclose them. According to the previous buyback pace, a 2% shareholder return yield could not support the stock price during its rapid decline.

During the conference call, the company revealed that it is discussing a dividend plan, and at the same time, setting a "floor level" for the buyback plan to reduce seasonal fluctuations. If a good return plan can be implemented, it will help boost the stock price in the short term and provide bottom support.

7. Detailed financial report data overview

Dolphin Research's View

Overall, the third quarter results are in line with expectations, with minor expectation differences possibly coming from "traditional advertising not being so bad" or "AI marketing services exceeding expectations," with Dolphin Research leaning towards the latter being more likely.

Regardless, Baidu is eager to turn the page and start telling the new AI story, as compared to the uncertain traditional advertising, the AI narrative is smoother. Across the ocean, the model to emulate—Google—has also essentially shed the advertising company label and is fully committed to becoming the new AI leader.

However, the core difference is that Google's AI transformation, at least for now, brings a complete "net increment," without experiencing a rapid decline in its main business. Meanwhile, Google's Gemini is also a global T0-level large model, with the heavyweight Gemini 3.0 poised to launch soon.

In contrast, Baidu's advertising slump aside, the key AI value is also discounted, mainly because its relative advantage over peers is not as pronounced as Google's. For example, in large models, a score of 90 is rare, but Chinese peers can achieve a score of 80 with great competition. Therefore, the first-mover advantage of Wenxin Yiyan is diminishing. In the current global large model comprehensive performance rankings, the TOP25 mainly includes Kimi, Qwen, and Deepseek from China.

In this context, as the third quarter saw repeated chip sanctions, under the logic of domestic substitution, "Kunlun Chip" with China Mobile orders finally brought Baidu closer to the center stage, and with market recognition and speculation of the full-stack AI logic, Baidu's stock price once rose from $90 to $150 per share, with a two-month increase of over 60%.

In the short term, this increase is indeed too crowded (AI part valuation is detached from actual performance). In last quarter's commentary, Dolphin Research conducted a valuation range estimate for Baidu (refer to "Baidu's 'Breaking the Pot and Sinking the Boat,' Can It Bring New Life?"), and now the third quarter results are basically inline, so we do not make many adjustments to performance expectations. Short-term market sentiment mainly reflects on valuation multiples and the choice of which assets to include.

Considering the company's plan to increase shareholder returns, dual listing, and inclusion planning, if subsequent market sentiment warms up, with a neutral to optimistic outlook, "net cash + core advertising + cloud" can be used for sum-of-the-parts valuation, with "autonomous driving" as an upward option when sentiment is more positive.

The overall idea is the same as last quarter, but the PS valuation multiple for the cloud business is slightly increased from 3x to 3.5x, reflecting the full-stack AI premium brought by Kunlun Chip. Ultimately, 14.8 billion net cash (short-term cash - short-term loans) * 90% + 13.4 billion core advertising + 12.2 billion Baidu Cloud = 42.5 billion USD.

However, Dolphin Research still reminds that Baidu's advertising risk has not turned the page, and it is still difficult to shed the label. From the perspective of certainty and cost-effectiveness, before the clear arrival of the advertising inflection point, betting on Baidu still requires leaving a safety cushion based on one's risk preference and maintaining range trading at all times.

Below are detailed charts

Baidu is relatively rare among internet companies in breaking down its performance into:

1. Baidu Core: covering traditional advertising business (search/information flow advertising), and innovative business (smart cloud/DuerOS Xiaodu speaker/Apollo, etc.);

2. iQIYI business: membership, advertising, and copyright licensing, etc.

The separation of the two businesses is clear, and with iQIYI as an independently listed company with detailed data, Dolphin Research also breaks down the two businesses in detail. Due to approximately 1% (2-4 billion) offset items between the two major businesses, the detailed data of Baidu Core split by Dolphin Research may slightly differ from actual reported figures, but it does not affect trend judgment.