China’s search giant faces its steepest sales decline since 2022 as AI transformation costs mount

Baidu Inc. reported a 4% revenue drop to 32.7 billion yuan ($4.6 billion) in Q2 2025, its worst sales performance since the pandemic. Lead broker at Fimatron breaks down how the AI pivot reshapes investor expectations. Shares fell 3% in Hong Kong despite net income rising 33%, highlighting investor skepticism about AI offsetting search business decline.

Traditional Revenue Streams Under Siege

Baidu’s core search operation faces unprecedented pressure from social-video platforms. Online advertising revenue plummeted 15%, driven largely by users migrating to Xiaohongshu and Douyin for discovery and shopping. This shift represents more than a temporary trend, it signals a fundamental change in how Chinese consumers interact with digital content.

CFO Henry He acknowledged the challenging environment, stating that “Q3 expected to be especially challenging” as AI search monetization remains in early stages. The admission reveals Baidu’s precarious position: burning cash on AI development while watching traditional revenue evaporate.

The advertising decline isn’t just about platform competition. Corporate uncertainty in China’s current economic climate has reduced marketing spend across industries. Companies are pulling back on digital advertising budgets, creating a double hit for Baidu’s already struggling search revenue.

Cloud Growth Offers Strategic Lifeline

While search revenue declined, Baidu’s non-marketing revenue surged 34%, primarily driven by cloud services demand. This growth represents the company’s most promising revenue diversification since its founding. Enterprise clients are increasingly adopting Baidu’s AI cloud infrastructure, particularly for data processing and machine learning applications.

The cloud division’s performance suggests Baidu’s AI investments are finding commercial traction, albeit slowly. Companies across the manufacturing, finance, and retail sectors are integrating Baidu’s AI tools into their operations. However, cloud services typically carry lower margins than search advertising, creating pressure on overall profitability.

Baidu’s Ernie chatbot ecosystem is central to this cloud strategy. By bundling AI capabilities with cloud infrastructure, the company aims to create sticky enterprise relationships that generate recurring revenue. Early adoption metrics show promise, but scale remains limited compared to the company’s search legacy.

Robotaxi Ventures Expands Globally

Baidu’s Apollo Go service represents perhaps its boldest AI application. Driverless rides more than doubled to 2.2 million in Q2, with cumulative rides surpassing 14 million by August. 

The service operates regularly in Beijing, Guangzhou, and Wuhan, making China one of the world’s most advanced autonomous vehicle markets.

International expansion plans include Singapore and Malaysia launches before year-end. These moves position Baidu ahead of Western competitors in commercializing autonomous vehicle technology. The company’s partnerships with Uber and Lyft provide additional validation for its self-driving capabilities.

However, robotaxi operations remain heavily subsidized. Each ride currently loses money as Baidu prioritizes market share over profitability. The path to sustainable robotaxi economics depends on achieving massive scale and reducing per-vehicle operational costs.

Competitive Pressure Intensifies

Baidu faces formidable competitors in China’s AI race. Alibaba’s Qwen and Tencent’s AI offerings have gained significant market share since Baidu’s early Ernie launch. Open-source models like DeepSeek are also eroding Baidu’s competitive moats by offering comparable AI capabilities at lower costs.

The company’s decision to abandon its paid subscription model for Ernie reflects this competitive reality. By open-sourcing its proprietary models, Baidu hopes to accelerate adoption while monetizing through complementary services. This strategy mirrors successful open-source software companies but requires different execution skills.

ByteDance and other AI-native startups pose additional threats. These companies design products specifically for AI-first experiences, while Baidu adapts existing services. The architectural differences may prove significant as user expectations evolve.

Financial Metrics Signal Transformation Costs

Baidu’s adjusted operating income dropped 41% to 4.4 billion yuan, reflecting heavy AI investment costs. Gross margins fell to 43.9%, down from previous quarters, as the company shifts toward lower-margin cloud services.

The company’s stock price gained only 6% year-to-date, significantly trailing Alibaba and Tencent’s performance. This relative underperformance suggests investors remain skeptical about Baidu’s AI transformation timeline.

Cash flow remains positive, providing a runway for continued AI investments. However, the company faces difficult resource allocation decisions as traditional revenue sources continue declining faster than AI revenues scale.

The Road Ahead: Patience Required

Co-founder Robin Li admitted the company is “not yet at the stage for large-scale monetization” regarding AI initiatives. This honest assessment reflects the long-term nature of Baidu’s transformation.

The next 12-18 months will prove critical for Baidu’s AI strategy. The company must demonstrate meaningful AI revenue growth while stemming further search revenue decline.

Baidu’s situation mirrors other tech giants transitioning from legacy business models to AI-first operations. The companies that succeed typically show clear AI revenue acceleration within three years of major investment cycles.

Investment Verdict: Calculated Risk

Baidu represents a classic transformation story with uncertain outcomes. The company’s AI capabilities are genuine, but monetization timelines remain unclear. Investors must weigh potential AI upside against continuing search revenue decline and margin compression.

The stock trades at attractive valuations relative to AI peers, reflecting skepticism about execution risks. Patient investors with high risk tolerance may find an opportunity, but expect continued volatility as quarterly results reflect this challenging transition period.