79% YoY Growth in AI Cloud Revenue Offsets Advertising Decline; Nomura Maintains Buy on Baidu

Overview

Nomura Securities released a research report analyzing Baidu’s Q1 2026 earnings. The report notes that although traditional online marketing business remains under pressure, the strong growth in AI cloud infrastructure revenue (+79% YoY) effectively offset this drag, driving Baidu Core Business (BGB) revenue above expectations. The firm maintains its 'Buy' rating on Baidu with a target price of USD 186, believing the company is successfully transitioning to an AI-driven business model, and that capital initiatives—including the spin-off of Kunlunxin (KLX), potential listing on the Hong Kong Stock Exchange as a primary listing, and other strategic moves—could further unlock shareholder value.

Core views

Performance exhibits pronounced structural divergence. Baidu Core Business (BGB) Q1 revenue reached RMB 26 billion, up 2.1% YoY and exceeding Bloomberg consensus by 4%. Online marketing services revenue stood at RMB 12.6 billion, down 21.3% YoY and 4% below expectations—representing the main drag. In contrast, AI cloud infrastructure revenue surged 79% YoY to RMB 8.8 billion, exceeding Nomura’s forecast by 9%. This growth was primarily driven by a 184% expansion in GPU cloud revenue, supported by its chip subsidiary Kunlunxin (KLX). On profitability, BGB non-GAAP operating profit declined 19% YoY to RMB 4 billion, reflecting continued investment in AI and autonomous driving, yet still exceeded market consensus by 20%. Non-GAAP operating margin stood at 15.2%, down 3.9 percentage points YoY but 2.1 percentage points above expectations. AI core-enabling revenue reached RMB 13.6 billion, up 49% YoY, now accounting for 52% of total BGB revenue—signaling a substantive shift in business focus. Management guidance and capital actions are noteworthy. Although no formal quarterly guidance was provided, management indicated that AI cloud infrastructure will sustain strong momentum, supported by Kunlunxin’s chip business, while advertising revenue decline may modestly narrow from Q1’s -21%. Capital expenditures totaled RMB 5.8 billion in Q1—markedly higher than the prior-year quarterly average of RMB 2–3 billion—and are expected to remain at this elevated level for the full year. Additionally, Baidu confirmed regulatory approval to purchase H200 chips, though actual procurement has not yet occurred. On capital return, the company spent USD 172 million on share repurchases in Q1 and plans to announce its 2026 cash dividend after the Kunlunxin IPO and before year-end, while also considering converting its Hong Kong listing from secondary to primary to unlock additional asset value.

Analysis framework

Nomura employs a Sum-of-the-Parts (SOTP) valuation methodology to assess Baidu, focusing separately on the intrinsic value contributions of its legacy advertising business versus emerging AI cloud operations. Analytically, the firm decomposes BGB revenue structure to quantify the contribution of AI cloud infrastructure growth to overall performance, and benchmarks Baidu’s cloud growth and AI product mix against Alibaba’s cloud business to evaluate competitive positioning. Furthermore, Nomura incorporates management’s capital expenditure (Capex) guidance and expectations around the Kunlunxin IPO to assess future cash flow dynamics and shareholder return potential.

Methodology notes

• Valuation MethodologySOTP Valuation

  Sum-of-the-Parts Valuation

  A valuation approach where distinct business segments (e.g., advertising, cloud, autonomous driving) are valued independently and then aggregated. It is particularly suitable for diversified companies with segments at markedly different stages of development, enabling more accurate reflection of each segment’s intrinsic value.

• Industry / Sector Analysis FrameworkVolume-price decomposition

  Revenue Driver Decomposition

  Decomposing total revenue into individual product lines (e.g., online marketing vs. AI cloud) and analyzing volume and pricing trends across each to identify growth engines and headwinds—providing investors clarity on tangible progress in business transformation.

• Corporate Fundamentals & Financial FrameworkFree cash flow analysis

  Relationship Between Capital Expenditures and Free Cash Flow

  Assessing how substantial increases in capital expenditures (Capex) compress short-term free cash flow, while evaluating whether these investments can generate higher long-term profitability and cash generation—a critical lens for assessing capital-intensive technology transformations.

Asset mapping & comparison

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

• Baidu (BIDU.US/09888.HK)

  Direct beneficiary; rapid AI cloud growth drives valuation re-rating

  Strengths

  Strong AI cloud infrastructure growth (+79% YoY), in-house chip capability via Kunlunxin, leadership in autonomous driving

  Weaknesses

  Persistent decline in legacy advertising business, sharply increased capex pressuring short-term profitability

  Comparison

  Cloud revenue size is ~40% of Alibaba Cloud’s external customer revenue, but AI-related product share is higher

  Risks

  Search advertising deterioration accelerates beyond expectations; cloud and chip revenue growth slows

Key data

• BGB RevenueRMB 26 billionUp 2.1% YoY; 4% above consensus
• Online Marketing RevenueRMB 12.6 billionDown 21.3% YoY; 4% below expectations
• AI Cloud Infrastructure RevenueRMB 8.8 billionUp 79% YoY; 9% above Nomura’s forecast
• BGB Non-GAAP Operating ProfitRMB 4 billionDown 19% YoY; 20% above consensus
• GPU Cloud Revenue Growth184%YoY expansion, accelerating growth
• Q1 Capital ExpendituresRMB 5.8 billionSignificantly higher than prior-year quarterly average

Impact & implications

The report contends that Baidu is at a pivotal stage in its transition from search advertising to AI cloud services. The rising share of AI cloud revenue not only offsets advertising declines but also improves revenue quality. As Kunlunxin’s chip business matures and approaches potential IPO, and as autonomous driving assets gain recognition, Baidu could command a higher valuation multiple. The maintained Buy rating reflects confidence in its medium-term performance, suggesting the current 15x forward P/E for FY2026 fails to fully reflect its AI growth potential.

Risks

• Search advertising deterioration accelerates beyond expectations
• Cloud services and chip revenue growth falls short of expectations
• New regulatory risks emerge in other advertising verticals

What to watch

• Progress and timeline of Kunlunxin (KLX) IPO
• Specific payout ratio for 2026 cash dividend
• Process of converting Hong Kong listing from secondary to primary
• Final regulatory approval status for H200 chip procurement