Baidu 2Q26 Preview: Strong AI Cloud Growth Unable to Offset Advertising Decline and Investment Pressure

Overview

This report is Morgan Stanley's preview update on Baidu Inc's 2Q26 results. The core conclusion is that AI cloud remains a high-growth business, but search advertising is still at a trough, while increased AI-related investment in the second half will weigh on core operating profit. The report cuts the target price from US$140 to US$130 and maintains an Equal-weight rating.

Core views

The report believes Baidu's near-term fundamentals remain balanced: AI cloud infrastructure is the main growth highlight, Qianfan MaaS platform token usage is rising rapidly, and cloud business margins are improving as AI cloud accounts for a larger share of the mix. However, online advertising is affected by the macro environment and AI transformation, limiting recovery potential in 2H26. Given insufficient visibility into the transformation of the core business and the early stage of AI monetization, the report sees limited upside from the current share price to the target price and remains cautious on the fundamentals.

Analysis framework

The analysis covers the 2Q26 revenue and profit preview, segment growth decomposition, earnings estimate revisions, SOTP valuation, and risk-reward scenarios. The report cuts its 2026 and 2027 core revenue forecasts, mainly reflecting weakness in the advertising business; it also lowers operating profit forecasts by 11%-12% due to increased AI investment.

Methodology notes

• Valuation methodsSOTP

  Sum-of-the-parts valuation

  The target price is derived using a sum-of-the-parts approach, with the core business valued using DCF and associated investments valued based on market-implied valuations with a holding-company discount applied.

• Valuation methodsDCF

  Discounted cash flow

  The core business DCF uses an 11% discount rate and a 3% perpetual growth rate, implying a core business value of US$123 per share in the base case.

• Scenario AnalysisBull/Base/Bear Case

  Bull, base, and bear case scenarios

  The target prices are US$175 in the bull case, US$130 in the base case, and US$90 in the bear case, with the differences primarily driven by assumptions for core business DCF value and discounts on associated investments.

Asset mapping & comparison

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

• Baidu Inc (BIDU.O)

  Covered security

  Strengths

  Strong growth in AI cloud infrastructure, triple-digit growth in GPU cloud, rapidly rising Qianfan MaaS token usage, and improving cloud business margins as the business mix improves.

  Weaknesses

  Online advertising remains at a trough, with macro weakness and AI transformation weighing on search advertising recovery; increased AI investment in 2H26 will drag on core operating profit.

  Comparison

  The US$130 target price implies 14x 2027e non-GAAP P/E, compared with approximately 13x currently and a historical trading range of approximately 9-30x.

  Risks

  Advertising recovery below expectations, slower-than-expected AI monetization, AI disruption to search, intensifying competition, and rising content investment.

• Trip.com Group Ltd / IQIYI Inc

  Components of associated investment valuation

  Strengths

  Associated investments contribute approximately US$7 per share in value in the base case and approximately US$12 per share in the bull case.

  Weaknesses

  A holding-company discount must be applied in the valuation, at 30% in the base case and 50% in the bear case.

  Comparison

  The core business DCF remains the main source of the target price, while associated investments contribute only a smaller portion.

  Risks

  Fluctuations in the market valuation of associated investments or a widening discount would affect the SOTP valuation.

Key data

• 2Q26 Core Revenue ForecastRMB25.3 billionDown 4% year over year.
• 2Q26 Core Non-GAAP Operating Profit ForecastRMB3.7 billionDown 15% year over year, with an operating margin of approximately 14.7%.
• 2Q26 Online Advertising Revenue ForecastRMB13.0 billionDown 18.5% year over year, compared with a 21% year-over-year decline in 1Q26.
• 2Q26 AI Cloud Infrastructure Revenue ForecastRMB7.6 billionUp 56% year over year, supported by triple-digit growth in GPU cloud.
• 2026 Full-Year Core Non-GAAP Operating Profit ForecastRMB13.8 billionDown 3%-4% year over year.
• Target PriceUS$130.00Cut from US$140.00, implying 14x 2027e P/E.
• Current PriceUS$117.53The price disclosure date in the table is 2026-07-10.
• Target Price Upside11%Corresponding to an Equal-weight rating.

Impact & implications

The investment implication is that a valuation recovery for Baidu requires stabilization in advertising, sustained AI cloud growth, and clearer conversion into profit contribution. Although AI cloud growth is strong, the slow advertising recovery, early stage of AI monetization, and increased R&D and model investment limit near-term earnings leverage. The spin-off of non-core assets, first dividend, and potential dual primary listing could serve as event catalysts, but are insufficient to change the report's neutral rating.

Risks

• A weak macro environment could cause advertising budgets to recover more slowly than expected.
• AI could disrupt search advertising formats and monetization models.
• Adoption of AI-related applications in the Chinese market could fall short of expectations.
• Increased investment in AI models, GPU cloud, and products could weigh on margins.
• Intensifying competition in search and online video could raise traffic acquisition costs and content investment.
• Progress on the spin-off of non-core assets, dividend payment, or dual primary listing could fall below market expectations.

What to watch

• Whether actual 2Q26 core revenue and core non-GAAP operating profit meet expectations of RMB25.3 billion and RMB3.7 billion, respectively.
• Whether AI cloud infrastructure revenue can sustain approximately 56% year-over-year growth and whether GPU cloud can continue to grow at a triple-digit rate.
• Whether the year-over-year decline in online advertising narrows further from 1Q26's -21% and whether recovery visibility improves in 2H26.
• Whether growth in Qianfan MaaS platform token usage can translate into revenue and profit contribution.
• The intensity of AI investment in 2H26 and changes in the R&D expense ratio and operating margin.
• Progress on the spin-off of non-core assets, the first dividend before year-end, and the potential dual primary listing in 1Q27.