Baidu’s stock fell 8% despite AI progress, with Ernie Bot generating $91 million, or under 2% of revenue. High expectations and a Chinese equity rout impacted shares, trading below 10x forward earnings.
Artificial intelligence stocks are highly sought after by investors worldwide, except for Baidu. Although China’s $36 billion search engine operator opens a new tab and lags behind artificial intelligence leaders like Microsoft, it has advanced towards developing a response to OpenAI’s ChatGPT.
Various line items at Baidu Inc. have demonstrated arguably the best performance in recent years in the company’s earnings release for Q4 and FY 2023. Despite this, the stock is alleged to have underperformed, which caused the price to decline.
Baidu may be the world's most unloved AI stock https://t.co/KdPzap9Szb
— Shehzad Younis شہزاد یونس (@shehzadyounis) February 29, 2024
Baidu’s stock
Despite decent results, Baidu’s stock plunged 8% in New York trading on Wednesday. It now trades at less than 10 times its projected earnings. The blame can be put on excessive expectations and a wider decline in Chinese stocks.
Going with quarterly results, the company is starting to monetize its AI bets. However, the numbers look promising as the company’s foundational model and AI product, Ernie Bot, generated revenue of 656 million yuan ($91 million) in the three months to the end of December. That represents less than 2% of Baidu’s top line, which is mostly made up of advertising revenue, but boss Robin Li is confident that AI-related services will increase sales by “several billion” yuan this year.
$SPY $SONG $QQQ Baidu Shares Fall After Management Strikes Cautious Tone for 2024 https://t.co/AhwszAVEYl $BTC pic.twitter.com/gf6OxV0eHO
— Jake P. Noch (@Jake_P_Noch) February 29, 2024
Moreover, Baidu’s New York shares have fallen by a quarter in the last 12 months after the latest selloff. In contrast, the global surge in AI that boosted stocks across the U.S., Europe, and Japan has helped OpenAI-backer Microsoft and Google-owner Alphabet rise more than 50% over the same period. One reason is the selloff in Chinese equities, but even upstarts are generating more excitement: a year ago, Moonshot AI, a Chinese startup, raised over $1 billion at a $2.5 billion valuation.
Displeasure from investors
Investors expressed dissatisfaction with Baidu’s fourth-quarter results. The company’s $4.9 billion in revenue represented a 6% increase from the previous year, but its $0.95 diluted earnings per American depositary share (ADS) dropped by 50%.
To put those figures in perspective, analysts’ consensus projections were for $4.86 billion in revenue and $2.48 in per-ADS earnings. As a result, profits were significantly below investor expectations.
Not all bad news, though, as ERNIE, Baidu’s ChatGPT-like product, contributed to increased revenue in spite of the continuous decline in advertising, the company’s main source of income. However, high investments in artificial intelligence (AI) have weighed on profits and eroded the company’s bottom line.
The crisis in China’s real estate market is making things worse. The fact that a judge just last month ordered the liquidation of China Evergrande Group, a real estate developer, serves as an example of the continued difficulties facing the nation as a result of the decline in real estate transactions.
China Evergrande ordered to liquidate in landmark moment for crisis-hit sector https://t.co/q8V2UbrHXy pic.twitter.com/5EGf8jMrlR
— Tracy (𝒞𝒽𝒾 ) (@chigrl) January 29, 2024
China’s house sales fell 6.5% in the previous year, and analysts predict more bad times ahead. Even worse, according to some accounts, real estate accounts for about 25% of China’s GDP.
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