Nomura: Baidu's AI Cloud Growth Offsets Advertising Decline, Maintains Buy

Overview

Nomura Securities released a research report on Baidu's Q1 2026 performance. The report notes that despite continued weakness in traditional online marketing, explosive growth in Baidu's AI cloud infrastructure business (+79% YoY) effectively offset the negative impact, driving AI-driven business revenue share above 50%. The institution maintains a 'Buy' rating and $186 target price, citing smooth AI transition progress and enhanced underlying computing power advantages through chip subsidiary Kunlunxin.

Core views

Performance shows clear structural divergence. Baidu Core Business (BGB) Q1 revenue reached RMB 26 billion, up 2.1% YoY, exceeding Bloomberg consensus by 4%. Online marketing service revenue was RMB 12.6 billion, down 21.3% YoY, missing expectations by 4%, continuing to be the main drag. However, AI cloud infrastructure revenue grew 79% YoY to RMB 8.8 billion, exceeding Nomura's expectations by 9%, strongly supporting overall performance. AI transformation has become Baidu's core growth engine. In Q1, Baidu's core AI-driven business revenue totaled RMB 13.6 billion, up 49% YoY, accounting for 52% of BGB revenue. This growth was mainly driven by AI cloud infrastructure, with GPU cloud revenue showing a staggering 184% YoY growth (143% in previous quarter), benefiting from chip subsidiary Kunlunxin (KLX). In contrast, AI application revenue was flat, while AI-native marketing services grew 36%. In terms of profitability, affected by weak online marketing and continued investments in AI and autonomous driving, BGB non-GAAP operating profit fell 19% YoY to RMB 4 billion but still exceeded consensus by 20%. Non-GAAP operating margin was 15.2%, down 3.9pp YoY but 2.1pp above expectations. Management revealed in the earnings call that Baidu Cloud total revenue grew 53% YoY to RMB 11.3 billion, with AI cloud infrastructure accounting for 78%. Compared to Alibaba Cloud, Baidu's external customer cloud revenue is about 40% of Alibaba's but growing faster. Long-term, management expects AI cloud infrastructure gross margin to reach 25-30%, with GPU cloud gross margin at 35-40%. Capex in Q1 reached RMB 5.8 billion, significantly higher than last year's quarterly average, with full-year levels expected to remain high. Additionally, Baidu confirmed approval to purchase H200 chips but has not yet made actual purchases, possibly awaiting final regulatory approval.

Analysis framework

The institution used sum-of-the-parts (SOTP) valuation combined with discounted cash flow logic. First, by dissecting Baidu Core Business (BGB) revenue structure, separating traditional advertising from emerging AI cloud businesses to identify growth momentum shifts. Second, comparing cloud business growth rates and AI product shares with competitors like Alibaba Cloud to validate Baidu's competitive position and market share potential in AI cloud. Finally, combining management's long-term gross margin guidance and capex plans to assess AI investment's short-term profit pressure and long-term value release potential, leading to the maintained Buy rating conclusion.

Methodology notes

• Valuation MethodSOTP Valuation

  Sum-of-the-parts Valuation

  As Baidu contains both mature but declining advertising and high-growth AI cloud businesses, a single valuation multiple cannot reflect true value. The institution uses SOTP, valuing different business segments separately before summing, to more accurately capture value reassessment from AI transition.

• Industry Analysis FrameworkVolume-Price Breakdown

  Revenue Driver Analysis

  Breaking total revenue into online marketing (volume and price decline) and AI cloud (volume growth with stable or rising prices) helps investors understand that while total revenue growth slows, revenue quality is shifting toward higher-margin AI infrastructure.

Asset mapping & comparison

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

• Baidu (BIDU.US / 09888.HK)

  Direct beneficiary, AI cloud growth offsets advertising decline

  Strengths

  Fast AI cloud infrastructure growth (+79%), in-house chip subsidiary Kunlunxin, significant cloud business gross margin upside

  Weaknesses

  Continued decline in traditional online marketing (-21.3%), large capex increase pressures short-term free cash flow

  Comparison

  Cloud revenue about 40% of Alibaba's, but higher AI product share and faster growth

  Risks

  Search advertising deterioration faster than expected; cloud and chip revenue growth slowdown; new advertising regulation risks

Key data

• BGB RevenueRMB 26 billionUp 2.1% YoY, exceeding expectations by 4%
• Online Marketing RevenueRMB 12.6 billionDown 21.3% YoY, missing expectations by 4%
• AI Cloud Infrastructure RevenueRMB 8.8 billionUp 79% YoY, exceeding expectations by 9%
• GPU Cloud Revenue Growth184%YoY expansion, accelerating from 143% last quarter
• BGB Non-GAAP Operating ProfitRMB 4 billionDown 19% YoY but exceeding expectations by 20%
• Q1 Capital ExpenditureRMB 5.8 billionSignificantly higher than last year's RMB 2-3 billion quarterly level

Impact & implications

The report believes Baidu is at a critical transition from search advertising to AI infrastructure provider. While short-term advertising decline drags overall profits, AI cloud's rapid growth proves its technology monetization capability. With Kunlunxin IPO progress and potential accelerated dividends/repurchases, shareholder value may see further release. Measures like changing Hong Kong listing status from secondary to primary could also improve liquidity and valuation.

Risks

• Search advertising deterioration faster than expected
• Cloud services and chip revenue growth slower than expected
• New regulations in other advertising verticals

What to watch

• Kunlunxin (KLX) IPO progress and subsequent dividend policy
• Whether AI cloud infrastructure gross margin approaches 25-30% target
• Actual H200 chip procurement progress
• Whether Q2 share repurchase pace accelerates