Strong momentum in Baidu AI cloud, with lower growth and profit expectations for iQIYI

Overview

This report reviews the 1Q26 performance of Baidu and iQIYI and the key NDR takeaways. The core conclusion is that Baidu's cloud business is accelerating, driven by inference demand, GPU usage, better pricing and utilization, and expanding customer coverage, and AI Cloud is expected to remain strong; iQIYI, by contrast, faces weak membership and advertising growth and margin pressure.

Core views

For Baidu, Goldman Sachs highlights that AI Cloud Infra and GPU cloud are growing significantly faster than the industry, and that GPU cloud has higher gross margins than traditional CPU cloud, helping improve long-term cloud business profitability. The company is reducing quarterly revenue volatility by cutting non-recurring local private cloud projects, while maintaining operating margins of around 13%-14% through cost controls, headcount optimization, and discipline in selling expenses. For iQIYI, the report believes the outlook for membership and advertising growth is weaker than expected, and operating deleveraging has led to substantial downward profit revisions; therefore, it maintains a Neutral rating and lowers the target price.

Analysis framework

The report combines 1Q26 results, management NDR feedback, segment revenue changes, cloud business gross margin structure, capital expenditure and cash flow capacity, and iQIYI's P/E valuation framework to revise 2026E-28E revenue and profit forecasts for Baidu and iQIYI respectively.

Methodology notes

• Valuation methodsP/E target price methodology

  iQIYI 12-month target price

  Goldman Sachs uses the P/E valuation method for iQIYI, with a target price of US$1.6 based on 12x 2027E P/E; the previous target price was US$1.8 with a multiple of 13x, and the basis was rolled from average 2026-27E P/E to 2027E P/E.

• factor_modelGS Factor Profile

  Growth, financial returns, valuation multiples, and integrated factors

  Goldman Sachs Factor Profile ranks stocks by percentile across four attributes—Growth, Financial Returns, Multiple, and Integrated—through comparison with the market and industry peers, to supplement the investment context.

• corporate_actionM&A Rank

  M&A probability score

  Goldman Sachs M&A Rank scores the probability of a company becoming an acquisition target from 1 to 3, where 1 represents 30%-50%, 2 represents 15%-30%, and 3 represents 0%-15%; for companies ranked 1 or 2, the standard methodology incorporates M&A factors into the target price.

• financial_databaseQuantum

  Financial history, forecast, and ratio database

  Quantum is Goldman Sachs's proprietary database used to access company financial statement history, forecasts, and ratios, supporting both in-depth single-company analysis and cross-industry, cross-market comparisons.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Baidu Inc. (BIDU/09888.HK)

  One of the report's core covered companies, with focus on AI cloud, cloud infrastructure, and capital expenditure

  Strengths

  AI Cloud grew 53% YoY in 1Q26, AI Cloud Infra grew 79% YoY, and GPU cloud grew 184% YoY; full-stack capabilities, inference demand, and customer expansion support cloud growth above the industry.

  Weaknesses

  Advertising weakness and rapid changes in the cloud business mix continue to pressure non-GAAP gross margin; increased AI-related investment has led to downward revisions to 2026E-28E net profit forecasts.

  Comparison

  Management's goal is for cloud growth to outpace the market and major peers over the next few quarters; GPU cloud gross margin is expected to be higher than traditional CPU and memory services.

  Risks

  High capital expenditure, catching up in AI model capabilities, fluctuations in cloud pricing and utilization, weakness in the advertising business, and Not Rated limitations due to investment banking relationships.

• iQIYI Inc. (IQ)

  One of the report's covered companies, with focus on membership, advertising, margins, and target price

  Strengths

  There is still upside potential from improving content ROI, advertiser retention, and a recovery in membership growth.

  Weaknesses

  The outlook for membership and advertising growth is weaker than expected, and operating deleveraging has led to a sharp cut in profit forecasts.

  Comparison

  The rating is relative to entertainment and internet content companies in its coverage universe; the valuation was lowered from 13x to 12x 2027E P/E to reflect weaker growth.

  Risks

  Intensifying competition, execution risk, poor ROI on content costs, regulatory risk, and inability to retain or attract advertisers.

Key data

• Baidu AI Cloud 1Q26 growth53% yoyComposed of AI Cloud Infra and AI Applications, with growth faster than industry peers.
• Baidu AI Cloud Infra 1Q26 growth79% yoyDriven by token usage shifting from training to inference, customer expansion, and full-stack capabilities.
• Baidu GPU cloud 1Q26 growth184% yoyGPU cloud gross margin is higher than traditional CPU cloud, helping improve business mix.
• Baidu AI-powered business growth outlook30%+ yoyGoldman Sachs expects this to be supported by about 50%+ yoy growth in AI cloud infra.
• Baidu non-GAAP operating margin13%-14%The report believes this level was achieved in 1Q26 and may remain stable in 2026.
• Baidu net cashUS$22bnUsed to support high capital expenditure and shareholder return plans this year.
• Mid-term gross margin target for GPU cloud35%-40%Higher than traditional CPU and memory services.
• Gross margin for CPU and memory services25%-30%Used as a gross margin reference for traditional cloud services.
• Revision to Baidu 2026E-28E revenue forecasts+1% to +5%Mainly reflects stronger-than-expected momentum in the AI cloud business.
• Revision to Baidu 2026E-28E net profit forecasts-2% to -5%Mainly reflects higher AI-related investment.
• Revision to iQIYI 2026-28E revenue forecasts-6% to -7%Mainly reflects a weaker-than-expected outlook for membership and advertising growth.
• Revision to iQIYI 2026-28E net profit forecasts-93% to -31%Driven by operating deleveraging and margin decline.
• iQIYI target priceUS$1.612-month target price, based on 12x 2027E P/E, with rating maintained at Neutral.

Impact & implications

For Baidu, investor focus is shifting from traditional advertising pressure to AI cloud and GPU infrastructure growth, margin improvement, and capital expenditure affordability; if the share of AI-powered business rises and exceeds 50% of total revenue, it may help reduce the holding company discount. For iQIYI, the cuts to target price and earnings forecasts indicate that the quality of growth for the video platform still needs to be validated through improvements in membership, advertising, and content ROI.

Risks

• Baidu's rapid cloud business expansion requires continued high capital expenditure; if utilization or pricing improvement falls short of expectations, margin improvement may be delayed.
• Management acknowledged that Baidu's Ernie model capabilities still lag; if R&D progress falls short of expectations, MAAS revenue and AI application growth may be constrained.
• Baidu's advertising decline and business mix changes may continue to pressure non-GAAP gross margin.
• iQIYI faces weaker-than-expected membership and advertising growth, volatile content cost ROI, and competition and execution risks.
• Regulatory risks may affect video content, advertising, AI applications, and platform businesses.

What to watch

• Whether Baidu AI cloud continues to outpace the market and major peers over the next few quarters.
• Whether GPU cloud demand, pricing, and utilization continue to improve after token usage shifts from training to inference.
• Whether Baidu's AI-powered business revenue share can exceed 50%, and whether that reduces the holding company discount.
• Recovery in Ernie model capabilities and progress in MAAS revenue.
• The balance among Baidu's high capital expenditure, operating cash flow, US$22bn net cash, and shareholder returns.
• iQIYI membership growth, advertising demand, content cost ROI, and margin recovery.