Advertising business under pressure, AI cloud growth strong; maintain Buy but cut target price to USD 170

Overview

The report previews Baidu's 2Q26F results. Nomura believes traditional search advertising continues to be impacted by AI chatbots and changes in the competitive landscape, while AI cloud and AI infrastructure growth momentum remains strong. Weakness in the high-margin advertising business will compress operating margins, and higher non-operating losses may cause net profit to be significantly below market expectations. Despite lowering earnings forecasts and the target price, Nomura maintains its Buy rating.

Core views

The core divergence lies in the contrasting performance of the advertising business and AI-related businesses. Baidu Core revenue is expected to decline 4.5% YoY, with advertising revenue down 22%; over the same period, cloud revenue is expected to grow 37% and AI infrastructure revenue 51%. Baidu Core non-GAAP operating profit is expected to decline 14%, but may still be 3% above consensus; non-GAAP net profit is expected to decline 56%, mainly due to rising non-operating losses. Accordingly, Nomura lowers its FY26F and FY27F operating profit forecasts, but believes the current 14.4x FY26F P/E remains below the 22x level implied by the target price.

Analysis framework

The report analyzes segment revenue and profit forecasts, comparisons with the latest Bloomberg consensus, earnings forecast revisions, and sum-of-the-parts valuation. The valuation separately values Baidu's core advertising business and new businesses such as cloud, chips, Software as a Service, and Robotaxi, and forms a 12-month target price accordingly.

Methodology notes

• Valuation methodsSum-of-the-parts valuation method (SOTP)

  Separately value the mature advertising business and new businesses, then sum them to reflect the growth, profitability, and valuation characteristics of different businesses.

  Nomura assigns a USD 2.1bn valuation to Baidu's core advertising business, based on 3x FY27F P/E; new businesses including cloud, chips, Software as a Service, and Robotaxi are valued at a combined USD 31.5bn, resulting in a final target price of USD 170.

• Relative valuationP/E comparison

  Compare the current trading P/E with the P/E implied by the target price.

  Baidu currently trades at 14.4x FY26F P/E, while the USD 170 target price corresponds to about 22x FY26F P/E, lower than the 24x implied by the previous target price.

Asset mapping & comparison

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

• BIDU.US（BAIDU INC）

  Primary research target

  Strengths

  AI cloud and AI infrastructure are growing strongly, and new businesses cover cloud, chips, Software as a Service, and Robotaxi; the target price still offers 55.5% upside relative to the current price.

  Weaknesses

  The high-margin search advertising business has declined significantly, operating margin and net margin are under pressure, and non-operating losses have increased.

  Comparison

  Cloud revenue forecast is 9% above the latest Bloomberg consensus and operating profit forecast is 3% above; however, Core revenue is 1% below and net profit forecast is significantly below consensus.

  Risks

  Search advertising deteriorates faster than expected, cloud and chip revenue growth falls short of expectations, and regulation tightens in advertising verticals.

• Kunlunxin（unlisted）

  Baidu's chip business and potential listing catalyst

  Strengths

  Benefits from growth in AI infrastructure demand, and a potential listing could improve transparency of business value.

  Weaknesses

  Listing still awaits approval from the China Securities Regulatory Commission, and the timetable lacks visibility.

  Comparison

  The report does not provide comparable companies or a standalone transaction valuation.

  Risks

  Approval delays and chip revenue growth below expectations.

• IQ.US（IQIYI INC）

  Baidu's long-form video entertainment business

  Strengths

  Provides long-form video entertainment services and forms part of Baidu Group's business portfolio.

  Weaknesses

  This report explicitly excludes iQIYI from the core forecasts for Baidu Core and does not provide an analysis of its performance upside drivers.

  Comparison

  The report discloses its rating as Neutral and its price as USD 1.29.

  Risks

  Deterioration in user growth and time spent, intensified competition among long-form video platforms, and content regulatory risks.

Key data

• 2Q26F Baidu Core revenueCNY 25.1bn, YoY -4.5%Excluding iQIYI, 1% below the latest Bloomberg consensus.
• 2Q26F advertising revenue growthYoY -22%Affected by AI chatbots changing information acquisition methods and ongoing competition.
• 2Q26F cloud revenue growthYoY +37%9% above the latest Bloomberg consensus.
• 2Q26F AI infrastructure revenueCNY 7.4bn, YoY +51%Expected to continue maintaining strong growth momentum.
• 2Q26F non-GAAP operating profitCNY 3.8bn, YoY -14%Expected to be 3% above consensus, with operating margin down 1.7 percentage points YoY.
• 2Q26F non-GAAP net profitCNY 2.1bn, YoY -56%Below the consensus expectation of CNY 3.5bn, mainly affected by increased non-operating losses.
• 2Q26F non-GAAP net margin8.5%Expected to decline 9.8 percentage points YoY.
• Earnings forecast revisionsFY26F -6%; FY27F -5%Refers to Baidu Core non-GAAP operating profit forecasts, mainly due to lowered expectations for the advertising business.
• Target price and ratingBuy; USD 170Target price lowered from USD 190, implying 55.5% upside from the closing price of USD 109.33.

Impact & implications

In the short term, the decline in search advertising and margin compression may weigh on performance, while non-operating losses may also cause net profit to be significantly below expectations. In the medium term, rapid growth in AI cloud and AI infrastructure is expected to increase the weighting of new businesses in the valuation and partially offset structural pressure from the traditional advertising business. Kunlunxin's potential listing could become a valuation catalyst, but the approval timeline lacks visibility.

Risks

• Traditional search advertising deteriorates faster than expected.
• Cloud services and chip revenue growth is slower than expected.
• Other advertising verticals face new regulatory restrictions.
• Non-operating losses are higher than expected, further dragging net profit.
• Kunlunxin's listing approval is delayed or not granted.
• The target price may be affected by market conditions, macroeconomic conditions, and company earnings deviating from forecasts.

What to watch

• The actual decline in 2Q26 advertising revenue and trends in search traffic monetization.
• Whether AI cloud and AI infrastructure revenue can maintain the forecast growth rates of 37% and 51%.
• The ongoing impact of the advertising business decline on non-GAAP operating margin.
• The composition of non-operating losses and subsequent changes.
• Regulatory approval progress for Kunlunxin's listing application.
• Commercialization and valuation realization of new businesses such as cloud, chips, Software as a Service, and Robotaxi.