Report Interpretation

Overview

This post-2Q26 earnings review examines Baidu's transition toward AI-powered businesses and iQIYI's operating reset. Goldman Sachs sees strong AI cloud demand and an improving longer-run cloud mix at Baidu, but expects the benefits to be outweighed near term by investment costs and shrinking advertising; iQIYI's overseas progress does not offset weaker membership and profitability assumptions.

Core views

Goldman Sachs refreshed Baidu estimates after 2Q26 and frames the central debate as the balance between AI cloud growth and the required investment. It reduced 2026E-28E revenue estimates by 1% to unchanged, as solid cloud growth is offset by a weaker-than-expected advertising recovery. Net-profit estimates were cut by 13%-19% because AI investment is expected to rise over the next two years and because of foreign-exchange losses in 2026E. The institution estimates AI-powered businesses will account for close to 60% of Baidu Core revenue by year-end, with cloud margins improving, but it remains Not Rated on BIDU/9888.HK. The report expects AI cloud infrastructure growth to accelerate from 2Q26's 50% year-on-year rate to more than 60% year-on-year in 2H26. It attributes the 2Q slowdown partly to revenue and contract-recognition timing rather than demand deterioration: GPU-compute and MaaS demand remained strong, and infrastructure shipments are expected to ramp in 2H. GPU cloud is the principal growth and margin driver, while a more normal pace of traditional CPU-cloud project delivery should also help. Management cited rapid GPU-cloud momentum, broader customer acquisition aided by Baidu's positioning as a neutral cloud provider, and MaaS growth above triple digits year-on-year from a still-small base. It also indicated that customers are increasingly accepting 5%-10% traditional CPU-cloud price increases on renewal. The longer-run targets are quarterly cloud revenue growth faster than peers and cloud margins higher than peers. The offset is a pronounced rise in AI-related spending. Baidu's 2Q26 capex was almost double quarter-on-quarter and is expected to remain relatively high for the rest of 2026, using direct procurement as well as rents and finance leases. Goldman Sachs expects the company to spend more on Ernie training, expand its foundation-model team and seek tier-1 domestic-model capability. Management said roughly 80% of capex serves external AI-cloud infrastructure demand and 20% supports internal use, chiefly foundational-model development; 3Q26 capex is expected to be lower than 2Q26. The institution nonetheless expects higher depreciation and amortization, R&D expense and compute rentals to build through 2H26, reducing Baidu Core operating margin sequentially to 10%-11% from 15% in 1H26 and driving a forecast 10% year-on-year decline in Baidu Core operating profit in 2026E. Its longer-run case is that higher-margin GPU cloud will grow faster than the group and improve the overall margin mix into 2027. Advertising remains the principal structural drag. Goldman Sachs forecasts Baidu advertising to decline 21% year-on-year in 2H26, citing erosion in traditional search as AI tools alter user behavior, no breakthrough in Baidu's AI-search transition, and a challenging macro environment. The institution notes, however, that advertising's share of Baidu Core revenue is expected to fall to 40% in 4Q26E from more than 60% in 2025, which should progressively reduce its drag on the Core revenue trajectory. Management expects AI Marketing Services to improve sequentially and gradually return to positive year-on-year growth over the next two quarters, although this depends on macro conditions and chatbot competition. Baidu's AI applications are also expected to grow sequentially and year-on-year over the next two quarters, supported by overseas expansion and increasing domestic token consumption. Management highlighted monetization opportunities for Baidu Wenku and Baidu Drive overseas, and indicated that domestic users of products such as GenFlow may pay for token consumption when product quality is sufficiently differentiated. In capital allocation, management expects its first-ever dividend to become a meaningful component of shareholder return, while buybacks were constrained in 2Q26 by accelerated infrastructure investment and market volatility; it said it would revisit the pace of repurchases. Investors are also expected to focus in 2H26 on Baidu's proposed dual-primary-listing conversion and Southbound inclusion, and on progress of the announced Kunlunxin spin-off. iQIYI's section centers on strategic decentralization and AI adoption, which management believes can improve content-creation efficiency and, over the longer term, content costs, revenue quality, profitability and cash flow. Overseas membership was the 2Q26 bright spot, growing 40% year-on-year and remaining profitable. Thailand delivered year-on-year membership-revenue and profit growth with improved profitability, while membership revenue in Brazil and Mexico grew 215% and 150% year-on-year, respectively. Management said further market expansion will be governed by unit economics and operating contribution rather than country count. Despite those overseas developments, Goldman Sachs lowered iQIYI's 2026E-28E revenue estimates by about 5%, primarily for weaker-than-expected membership and lower other revenue, partly offset by a slightly better advertising outlook. It cut 2027E-28E net-profit estimates by 14%-19% for lower margins from operating deleverage and revised 2026E non-GAAP net income to a RMB672 million loss from a prior RMB50 million profit, also reflecting higher tax expense in 2Q26. The institution reduced its 12-month target price to US$1.4 from US$1.6 while retaining Neutral, using an unchanged 12x 2027E P/E multiple.

Analysis framework

The report updates earnings forecasts after 2Q26 results, separating Baidu's cloud, AI application, advertising and investment drivers to assess revenue mix and margin effects. For iQIYI, it combines segment results, overseas operating indicators, revised earnings assumptions and a forward P/E valuation to derive the revised target price.

Methodology notes

• Industry AnalysisVolume-price decomposition

  Baidu cloud growth and margin analysis by GPU cloud, MaaS and traditional CPU cloud

  The report distinguishes demand, delivery timing, product mix and pricing to explain why cloud growth may accelerate and why margins could improve as GPU cloud becomes a larger share.

• Corporate Fundamentals and FinanceOperating and Financial Leverage Analysis

  Impact of capex, depreciation, R&D and compute rentals on operating profit and margins

  Goldman Sachs links higher AI investment to near-term operating-margin and profit pressure, while treating later mix improvement as the potential offset.

• Valuation methodsP/E and PEG Valuation

  iQIYI 12-month P/E-based target price

  The US$1.4 iQIYI target price is based on an unchanged 12x 2027E P/E multiple applied to revised earnings.

Asset mapping & comparison

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

• Baidu (BIDU/9888.HK)

  Primary covered company; AI cloud expansion is expected to support growth while elevated AI investment and advertising weakness pressure near-term profitability.

  Strengths

  Strong GPU-compute and MaaS demand, neutral-cloud positioning, expanding cloud customer base and potential higher-margin GPU-cloud mix.

  Weaknesses

  Structural advertising pressure and significant near-term capex, model-training and compute costs.

  Comparison

  Management aims for quarterly cloud growth and cloud margin above peers.

  Risks

  AI spending returns and monetization remain debated; macro conditions and search-ad disruption could prolong earnings pressure.

• iQIYI (IQ)

  Primary covered company; the report retains Neutral after lowering estimates and the target price.

  Strengths

  Profitable overseas membership growth and potential long-term content-efficiency gains from AI and decentralization.

  Weaknesses

  Weaker membership and other revenue, lower margins from operating deleverage and a revised 2026E loss.

  Comparison

  The US$1.4 target price retains a 12x 2027E P/E multiple despite lower earnings estimates.

  Risks

  Competition and execution, content-cost ROI, regulation, and advertiser retention and acquisition.

Key data

• Baidu AI cloud infrastructure growth50% year-on-year in 2Q26; 60%+ year-on-year expected in 2H262Q26 was partly affected by revenue and contract-recognition timing; GPU-cloud demand remains strong.
• Baidu estimate revisions2026E-28E revenue -1% to 0%; net profit -13% to -19%Reflects cloud strength offset by advertising weakness, higher AI investment and 2026E foreign-exchange losses.
• Baidu Core operating margin10%-11% expected in 2H26 versus 15% in 1H26Higher AI model training, depreciation, R&D and compute rentals are expected to cause sequential pressure.
• Baidu advertising outlook-21% year-on-year in 2H26EThe report cites structural search-ad erosion, AI-transition challenges and macro pressure.
• Baidu capex allocationApproximately 80% external demand and 20% internal useExternal spending is primarily AI-cloud infrastructure; internal spending is mainly foundational-model development.
• iQIYI overseas membership revenue+40% year-on-year in 2Q26Brazil and Mexico membership revenue grew 215% and 150% year-on-year, respectively.
• iQIYI 2026E non-GAAP net incomeRMB672 million lossRevised from a prior RMB50 million profit.
• iQIYI target priceUS$1.4Reduced from US$1.6; based on 12x 2027E P/E.

Impact & implications

Goldman Sachs' central implication is that Baidu's revenue mix is moving toward AI-powered businesses and potentially better cloud margins, but the financial benefit is delayed by investment intensity and ongoing advertising contraction. For iQIYI, overseas expansion validates parts of its strategy, yet weaker membership, lower revenue expectations and operating deleverage drive a reduced valuation outcome.

Risks

• For iQIYI, Goldman Sachs identifies risks from softer or more intense competition and execution challenges.
• iQIYI faces risk that content-cost ROI is weaker than expected.
• Regulatory risks could affect iQIYI.
• iQIYI could struggle to retain or attract new advertisers.

What to watch

• Baidu AI cloud infrastructure growth in 3Q26 and 2H26, including GPU-cloud demand and infrastructure shipment ramp.
• The scale and returns of Baidu's capex, Ernie-model investment and resulting pressure on cash flow and margins.
• The trajectory of Baidu advertising and whether AI Marketing Services returns to positive year-on-year growth over the next two quarters.
• Progress on Baidu's proposed dual-primary listing, Southbound inclusion and Kunlunxin spin-off.
• iQIYI's membership trends, overseas unit economics, margins and advertiser monetization.