Baidu Becomes China’s Cheapest Major Internet Stock Amid Fierce AI Competition

Baidu’s Valuation Plummets as AI Competition Intensifies

Baidu, once hailed as China’s answer to Google, is now trading at its lowest valuation among China’s major internet companies. The company’s shares have underperformed sharply, falling as much as 3% in Hong Kong after posting its worst quarterly revenue drop in over three years. Baidu’s stock now trades at around 9.7 times estimated forward earnings, the lowest among profitable firms on the Hang Seng Tech Index—even cheaper than troubled property developer Longfor Group Holdings. This dramatic decline reflects deep investor concerns about Baidu’s ability to compete in the rapidly evolving artificial intelligence (AI) sector, as well as the high costs it is incurring to catch up with rivals.

Once a dominant force in China’s internet landscape, Baidu’s core search business is now under siege from a new generation of competitors. Social platforms like Xiaohongshu and Douyin (the Chinese version of TikTok) have built vibrant content ecosystems that are drawing users away from Baidu’s more static, web-based offerings. As Eric Shen, an analyst at global research firm Third Bridge, explains:

“The company’s search arm, once a dominant cash generator, now faces stiff competition from Xiaohongshu and Douyin. These rivals have built content ecosystems that feel livelier and stickier, drawing users away from Baidu’s more static, web-based offerings.”

Despite the broader AI-fueled rally in Hong Kong’s tech sector, Baidu’s shares are up only about 3% this year, lagging far behind the 24% rise in the tech stock benchmark.

Why Is Baidu Losing Ground in China’s AI Race?

Baidu’s struggles are rooted in the fierce competition that now defines China’s AI sector. The company was an early mover in generative AI, launching its flagship ERNIE Bot in March 2023, just months after OpenAI’s ChatGPT took the world by storm. Initially, Baidu gained millions of users and appeared poised to dominate China’s AI chatbot market. However, the landscape quickly shifted as tech giants like Alibaba and ByteDance, as well as nimble startups such as DeepSeek, Moonshot AI, and Zhipu AI, entered the fray with their own advanced models.

DeepSeek, in particular, has shaken up the market by releasing high-performing large language models (LLMs) at a fraction of the cost of industry leaders. Its R1 model, for example, delivers performance comparable to top U.S. models but at significantly lower prices. This has forced Baidu and other established players to rethink their strategies and pricing.

In response, Baidu made a bold move: it announced that ERNIE Bot would be free for all users starting April 1, 2025. This decision was enabled by reductions in inference costs (the expense of running AI models), and it immediately escalated the industry’s price war. Baidu also unveiled a new “Deep Search” feature with enhanced reasoning capabilities, available for free, and committed to open-sourcing its ERNIE 4.5 model by the end of June 2025.

But the competition is not just about price. Baidu’s rivals have been quick to innovate, releasing models that excel in specific tasks such as coding, math, and image generation. ByteDance’s Doubao and Moonshot AI’s Kimi have become some of the most popular chatbots in China, while Alibaba’s Qwen model has gained traction in both enterprise and consumer markets. Even Apple, after considering Baidu as a partner for bringing AI to Chinese iPhones, ultimately chose to collaborate with Alibaba.

Baidu’s Strategic Shifts: Cloud, Robotaxis, and Open Source

Facing mounting pressure in its core search and advertising businesses, Baidu has pivoted aggressively toward AI-driven growth areas. The company’s AI Cloud division has emerged as a bright spot, with revenue surging 34% year-over-year in the second quarter of 2025 to over RMB 10 billion. Baidu’s Qianfan platform, which provides AI infrastructure and tools for enterprise clients, has helped the company become the top player in China’s AI public cloud market.

Generative AI-related revenue has nearly tripled, and Baidu’s ERNIE large language model now processes 1.65 billion API calls daily, serving sectors from education and e-commerce to manufacturing and finance. The company’s diversified customer base and rapid adoption among mid-tier businesses underscore its growing influence in the AI ecosystem.

Another area of focus is autonomous driving. Baidu’s Apollo Go robotaxi service has provided over 2.2 million driverless rides in the June quarter alone, with cumulative rides surpassing 14 million by August 2025. The company is expanding Apollo Go internationally, with operations in Singapore, Malaysia, Dubai, and Abu Dhabi, and is conducting trials in Hong Kong. While profitability remains a distant goal, Apollo Go demonstrates Baidu’s commitment to long-term innovation.

To further cement its AI leadership, Baidu has launched new models such as ERNIE 4.5 Turbo and ERNIE X1. The latter is a deep-thinking reasoning model capable of AI image generation, code interpretation, and complex calculations. Baidu claims ERNIE X1 matches the performance of DeepSeek R1 at half the price, while ERNIE 4.5 outperforms OpenAI’s GPT-4.5 in several benchmarks and is priced at just 1% of GPT-4.5’s cost. These models are being integrated across Baidu’s product ecosystem, including its search engine and cloud services.

Financial Performance: Resilience Amid Vulnerability

Baidu’s financial results paint a picture of a company in transition. In the second quarter of 2025, total revenue declined 4% year-over-year to RMB 32.7 billion, primarily due to a slowdown in its core internet search business and a 15% drop in online advertising revenue. However, net income rose 33%, buoyed by gains from long-term investments and cost-cutting measures. Baidu maintained a 17% non-GAAP margin and returned $677 million to shareholders through share repurchases.

The company’s shift away from advertising toward AI Cloud and autonomous driving is evident in its numbers. Non-marketing revenue grew 34%, driven by strong demand for cloud services. Baidu’s AI Cloud is now ranked No. 1 in China’s public cloud market, outpacing Alibaba’s aggressive pricing and Tencent’s integration of AI into gaming and social media.

Despite these positive signs, Baidu faces significant headwinds. The company’s streaming subsidiary, iQiyi, reported an 11% revenue drop and is seeking to raise $300 million through a Hong Kong listing. Analysts expect Baidu’s AI ventures to remain unprofitable for at least the next three years, as the company continues to invest heavily in research, development, and international expansion.

Regulatory risks are also rising. China has introduced new requirements for AI-generated content and stricter compliance standards, which could increase costs and limit monetization opportunities. Baidu must navigate these challenges while restoring confidence in its core advertising business, which remains under pressure from uncertainty in China’s corporate sector and competition from social media platforms.

China’s “Hundred Models” Strategy: Opportunity and Challenge

Baidu’s struggles are emblematic of the broader dynamics in China’s AI sector. Since 2017, when the government launched the “New Generation Artificial Intelligence Plan” with the goal of making China a global AI leader by 2030, the country has seen an explosion of AI startups and models. Over 100 large language models have emerged, leading to what Baidu CEO Robin Li has called a “war of a hundred models.”

This strategy, reminiscent of China’s approach to electric vehicles, has produced both industry leaders and a glut of unprofitable competitors. Many AI startups are now facing financial difficulties, and intense price wars have pushed some to seek overseas markets with higher profits and lighter regulatory burdens. China’s AI models still lag behind U.S. counterparts on major benchmarks, but the country leads in generative AI patents and contributes over 20% of global AI research.

Experts believe China will eventually catch up, thanks to advantages in power supply for data centers and massive investments in wind and solar energy. The “hundred models” approach increases the likelihood of breakthrough innovations, even as it creates short-term inefficiencies and fierce competition.

Key Players and Notable Startups

China’s AI ecosystem is supported by government subsidies for data centers and domestic chip production. Several startups have achieved unicorn status, including:

• Zhipu AI: Founded by a Tsinghua University professor, focused on super-scale natural-language AI.
• 01-AI: Launched by former Google China president Kai-Fu Lee, builds on open-source models with a focus on quality control.
• DeepSeek: A spinoff from a quantitative hedge fund, uses a “Mixture-of-Experts” architecture for high performance with fewer resources.
• Moonshot AI: Known for its Kimi chatbot, one of the most visited AI chatbots in China.

Major tech companies like Baidu, Alibaba, Tencent, and iFlyTek have been tasked with building open innovation platforms for AI. The defeat of top Chinese Go players by Google’s AlphaGo in 2017 was seen as a “Sputnik Moment,” spurring further investment and urgency.

Investor Sentiment: Is Baidu a Buy on the Dip?

Baidu’s stock has dropped 17% in the past month, underperforming both the broader internet services industry and the technology sector. The decline is attributed to a combination of US-China trade tensions, falling core online marketing revenue, and stiff competition in China’s digital landscape. Technically, Baidu shares are trading below their 50-day and 200-day moving averages, indicating a bearish trend.

Yet, some analysts see opportunity in Baidu’s discounted valuation and strong progress in AI, cloud, and autonomous driving. The company ended 2024 with RMB 170.5 billion in net cash and RMB 13.1 billion in free cash flow, and continues to buy back shares. Baidu’s AI Cloud revenue surged 26% year-over-year in the fourth quarter of 2024, and its ERNIE model is widely adopted across multiple sectors. The Apollo Go robotaxi service is expanding internationally, and Baidu’s diversified customer base includes internet services, automotive, manufacturing, energy, and finance.

Analyst sentiment is improving, with upward earnings estimate revisions and a consensus price target implying significant upside. Baidu trades at a discount to its industry and historical averages, with a Value Score of A. The majority of analysts rate it a “Strong Buy,” and the company holds a Zacks Rank #1 (Strong Buy).

What’s Next for Baidu and China’s AI Sector?

Baidu’s future hinges on its ability to outpace rivals in AI innovation, restore confidence in its advertising business, and navigate regulatory challenges. The company’s first-mover advantage in AI public cloud and alignment with national AI goals could justify a premium for medium-term investors, provided it can stabilize ad revenue and scale AI Cloud margins.

For China as a whole, the “hundred models” strategy is a double-edged sword. It fosters innovation and increases the chances of breakthroughs, but also creates intense competition and financial strain for many players. Whether Baidu can reclaim its leadership position or cede ground to newer, more agile startups remains to be seen. What is clear is that China’s AI sector is dynamic, well-funded, and determined to catch up with—and perhaps surpass—the West in the race for AI supremacy.

In Summary

• Baidu is now China’s cheapest major internet stock, trading at a steep discount due to investor concerns over its AI competitiveness and high costs.
• The company’s core search business is losing ground to social platforms like Xiaohongshu and Douyin, as well as innovative AI startups.
• Baidu has responded by making its ERNIE Bot free, launching new AI models, and shifting focus to AI Cloud and autonomous driving.
• Fierce competition and a “hundred models” strategy in China’s AI sector have created both opportunities and challenges for Baidu and its peers.
• Financially, Baidu is resilient but vulnerable, with strong growth in AI Cloud offset by declining ad revenue and rising regulatory risks.
• Analysts see potential for a rebound if Baidu can stabilize its core business and capitalize on its AI investments, but caution is warranted amid ongoing volatility.