Flash | 07 Dec 2025 15:51:41 ET │ 12 pages | Catalyst Watch: Upside | | | --- | --- | | Price (05 Dec 25 16:00) | US$125.66 | | Target price | US$181.00 | | Expected share price return | 44.0% | | Expected dividend yield | 0.0% | | Expected total return | 44.0% | | Market Cap | US$43,198M | Alicia Yap, CFAAC +852-2501-2773 alicia.yap@citi.com See Appendix A-1 for Analyst Certification, Important Disclosures and Research Analyst Affiliations Citi Research is a division of Citigroup Global Markets Inc. (the " ...

Core Insights - Baidu, Inc. is facing profit erosion due to rising costs while increasing investments in AI, leading to pressure on margins [1][2] - The company reported a negative free cash flow of RMB 4.7 billion and a 4% year-over-year decline in revenues to RMB 32.7 billion, with core online marketing revenue dropping 15% [2][9] - Despite short-term challenges, Baidu is positioning itself for long-term growth through AI Cloud initiatives and strong user adoption of AI-generated content [3][4] Financial Performance - In Q2 2025, Baidu's cost of revenues increased nearly 12% year-over-year, impacting operating leverage and EBITDA [1] - The company's free cash flow turned negative at RMB 4.7 billion, while revenues fell 4% year-over-year to RMB 32.7 billion [2] - The Zacks Consensus Estimate for full-year 2025 earnings is projected at $8.32 per share, reflecting a 20.99% year-over-year decline [14] AI Market Context - The global AI market is expected to grow at a compound annual growth rate of 35.9% through 2030, reaching $1.8 trillion, presenting a significant opportunity for Baidu [4] - Baidu's AI initiatives, including the Ernie model and Apollo Go's autonomous ride services, are gaining momentum despite current financial strains [3][9] Competitive Landscape - Competitors like Alphabet and Microsoft are also facing rising operating costs due to AI investments but have more diversified revenue streams and global reach, providing them with a competitive edge over Baidu [5][6] - Baidu's forward 12-month price/earnings ratio is 12.62, significantly lower than the industry average of 23.74, indicating potential undervaluation [11]