Baidu: Moat Downgraded to None from Wide; AI Segment Growth to Offset Search Decline In Long Run

Key Morningstar Metrics for Baidu

• Fair Value Estimate
  : $128.00
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : None
• Morningstar Uncertainty Rating
  : High

We have transferred coverage of Baidu. Non‑artificial-intelligence general business revenue, driven largely by search, fell 20% year over year in the fourth quarter. Online marketing revenue, mostly search‑related, is no longer disclosed.

Why it matters: Chinese users increasingly search within Little Red Book, social networking, short video, and AI chatbot apps. Peak daily active users during the Spring Festivals were 145 million for Doubao, 74 million for Qianwen, and 41 million for Yuanbao, according to Questmobile.

• Compared with Douyin, Alibaba, and Tencent, Baidu has a weaker ecosystem and fewer resources with which to compete in AI chatbots. While Baidu’s AI enterprise cloud benefits from switching costs, its minority revenue contribution is insufficient for us to assign the firm a moat.
• Baidu’s Kunlunxin is a first-tier GPU company in China in terms of revenue scale and customer quality, and should benefit from the country’s tech self-sufficiency goals. However, disclosures remain limited ahead of its IPO. We will reassess its moat as more details become available.

The bottom line: We downgraded Baidu’s moat to none from wide as its search business lost its moat. We cut our valuation by 12% to $128 per share, as lower earnings were partly offset by a lower WACC of 9.7% from 10.5%.

• We think the shares are undervalued, as the market has not fully priced in the earnings potential of Baidu’s AI-powered businesses, which will benefit from the excess demand for AI in China in the medium term.
• We assume a negative 11% CAGR in non-AI general business revenue during 2026-30, largely offset by a 23% CAGR in AI-powered businesses. We estimate a 27% net income CAGR, driven by a low base in 2025 following large impairments.

Long view: We forecast net margin expansion to 10% in 2030 from 4% in 2025, as AI-powered businesses scale and gain operating leverage amid strong AI demand.