Analysis: AI Chips, Cloud and Robotaxis Offer Baidu a Second Act — at a Cost

Baidu Inc., once a leading player in desktop-era search in China, has faced diminished prominence during the rise of the mobile internet, losing ground to competitors like Alibaba and Tencent. However, a significant stock rally in September, with shares on the Hong Kong Stock Exchange soaring over 44% and reaching a 2.5-year high of HK$138.4 ($17.8), signals renewed investor interest due to Baidu’s strategic shift toward artificial intelligence (AI) [para. 1][para. 2]. This surge occurred despite weak second-quarter financials that reflected declining advertising revenue and profits, highlighting a disconnect between current financial performance and market optimism [para. 2].

This investor enthusiasm primarily stems from Baidu’s evolving AI strategy, moving beyond its shrinking search engine business. The company is committing heavily to areas like cloud computing, autonomous driving, and proprietary chip manufacturing, aligning with China’s broader push for technological self-sufficiency [para. 3]. The urgency of this transition is underscored by the faltering legacy advertising business, which still constitutes over 60% of revenue but dropped 15% to 16.2 billion yuan in Q2 2024. The company’s total revenue also declined 3.6% year-on-year to 32.71 billion yuan ($4.6 billion), and its non-GAAP net profit sagged by 34.3% to 4.79 billion yuan [para. 5][para. 6]. Contrarily, non-advertising revenue exceeded 10 billion yuan for the first time, growing 34%, with Baidu AI Cloud serving as a primary driver [para. 7].

The sector’s landscape shifted following regulatory concerns over Nvidia’s H20 chips, fueling domestic demand for local alternatives [para. 8]. Baidu’s chip division, Kunlunxin, has leveraged this, with a notable billion-yuan deal to supply inference chips to China Mobile and with its third-generation P800 chips deployed en masse [para. 9][para. 10]. Despite holding just 2.53% of China’s data center chip market in 2024 (compared to Nvidia’s 69.63% and Huawei’s 23.55%), Kunlunxin’s compatibility with both Chinese and overseas partners, and avoidance of U.S. sanctions, makes it strategically advantageous [para. 11][para. 12]. Analysts foresee increased orders from major firms, especially if Kunlunxin becomes independent [para. 13].

Baidu AI Cloud is another key pillar, posting a 27% year-on-year revenue rise to 6.5 billion yuan in Q2 and comprising roughly a quarter of Baidu’s core revenue. Its growth spiked to 34% in the first half of 2025, driven increasingly by enterprise contracts and a recurring revenue model, with GPU-related services growing over 50% [para. 14][para. 15]. Though it trails Alibaba Cloud in scale, analysts predict Baidu could compete closely in the age of AI-specific infrastructure [para. 16]. Consumer AI applications also show promise, with Baidu’s Wenku platform boasting over 40 million paying users and 97 million monthly active users as of April [para. 17].

Baidu’s autonomous driving unit, Apollo Go, reached break-even per vehicle in Wuhan and completed 2.2 million fully driverless rides in Q2 2024—a 148% annual increase—accumulating over 14 million total rides by August [para. 19][para. 20]. The affordable RT-6 model and emerging overseas partnerships, including with Uber and Lyft, signal international ambitions, recently validated by a license in Dubai [para. 22][para. 23].

Despite these advances, some funds view Baidu’s recent rally as temporary. Challenges include lagging monetization of new AI-driven services, rising capital expenditure (up 80.81% year-on-year to 3.78 billion yuan), and negative free cash flow [para. 25][para. 27]. Rival giants Alibaba and Tencent are outspending Baidu significantly in AI. Baidu’s liquidity stands at 124.2 billion yuan, boosted by a 4.4 billion yuan notes issuance, but it still faces the challenge of translating its AI vision into sustainable profits [para. 30].