AI Winter upon us? Baidu revenue falls 4% as AI investments fail to offset ad decline

Chinese search giant Baidu reported a 4% drop in second-quarter revenue to 32.71 billion yuan ($4.56 billion), missing analyst expectations as its core advertising business declined 15% amid China’s economic slowdown. Despite heavy investments in artificial intelligence, including a major search interface overhaul, AI returns have yet to offset the advertising revenue decline that typically represents 60% of the company’s total income.

Key financial results: Baidu’s Q2 performance reflected broader challenges facing China’s tech sector during economic uncertainty.

• Total revenue of 32.71 billion yuan fell short of the 32.76 billion yuan analyst forecast, marking a 4% year-over-year decline.
• Online advertising revenue dropped 15% to 16.2 billion yuan, representing the company’s largest revenue segment.
• Cloud business revenue grew 27% to 6.5 billion yuan but couldn’t compensate for advertising losses.
• Adjusted earnings per share of 13.58 yuan beat expectations of 13.12 yuan.
• U.S.-listed shares fell 3% in early trading following the results.

The big picture: China’s economic headwinds are forcing companies to cut advertising spending, directly impacting Baidu’s search engine revenue model.

• Property market downturns, weak employment rates, and choppy consumer demand have led Chinese companies to reduce marketing budgets to protect margins.
• The advertising squeeze particularly affects Baidu since online ads typically constitute 60% of overall company revenue.

AI investment progress: Baidu has made significant strides in artificial intelligence integration, though monetization remains limited.

• The company launched a redesigned search interface last month, calling it the biggest overhaul in a decade.
• By July, 64% of mobile search result pages contained AI-generated content.
• Baidu has invested heavily in AI tools like Ernie Bot to retain users and slow advertising decline.

What they’re saying: Industry analysts remain cautious about AI’s near-term revenue potential for the search giant.

• “In the short term, AI will not fully offset advertising headwinds,” said Eric Shen, analyst at consultancy Third Bridge.
• “While AI tools like Ernie Bot can slow the decline by retaining users, they have not yet translated into meaningful ad revenue,” Shen added.
• CEO Robin Li emphasized on the post-earnings call that the company would take a “prudent approach to monetising AI features, keeping user experience as its top priority.”

Why this matters: Baidu’s results highlight the challenge facing Chinese tech companies trying to balance AI innovation investments with immediate revenue pressures from economic uncertainty, illustrating the gap between AI development costs and monetization timelines.