Baidu Inc - 2Q26 revenue miss with capex surge
- 2Q26 revenue (-4% y/y) miss consensus, while the q/q capex doubling raised ROI concerns with renewed commitment in model training
- Cut FY26F-28F adj. NP by 25% each; we expect OP recovery in FY27F as robust AI Infra outlook should outweigh drag from ads decline
- Maintain BUY on robust AI infra growth; potential Stock Connect inclusion and Kunlunxin IPO remained catalysts ahead; TP lowered to HKD131/USD134
2Q26 revenue miss – cloud miss more timing related with demand remained strong, while other AI-powered businesses growth disappointed. Baidu’s 2Q26 revenue fell 4% y/y to RMB31.3bn, 1% below consensus. Baidu General revenue declined 4% to RMB25.2bn, 4% below consensus. AI Cloud Infra grew 50% to RMB7.3bn but missed consensus by 3%, mainly because project delivery and revenue recognition crossed the quarter-end. GPU public cloud remained the strongest component, with growth accelerating to 283% from 184% in 1Q26. AI Applications grew 3% to RMB2.5bn, while AI-native marketing was flat at RMB2.6bn, both behind expectations. Legacy Business declined 23% to RMB10.4bn. Gross margin fell 4.9ppt to 39.0%, reflecting the mix shift towards AI infrastructure and higher depreciation. Non-GAAP operating profit declined 15% to RMB3.8bn but beat consensus by 3% on tighter opex. Non-GAAP net profit of RMB2.6bn missed by 23%, mainly due to a 31% tax rate, RMB1.2bn of FX losses and investment mark-to-market losses.
Our view in short – most negatives in the price, structural mix-driven growth recovery still intact, short-term catalysts in place. We see the 13% fall in the US session pricing in three things: capex has jumped while ERNIE pre-training restarts, which will likely drag capex ROI near-term; advertising is still falling and showed no signs of stablisation; and the Kunlunxin IPO, though still on-going, likely fall short of earlier expectations by 3Q26. That said, with expectations reset, we still see scope for re-rating. AI Cloud Infra should reaccelerate in 2H, and the shift towards GPU and Kunlunxin revenue lifts margins as it grows. The profit recovery we had expected in FY26F should land in FY27F — later, but still coming. And the dual-primary conversion opens the door to Southbound Stock Connect, expected within the year.
Capex is both the risk and the engine. Capex rose 92% q/q to RMB11.4bn against operating cash flow of RMB3.4bn, pushing free cash flow to -RMB8.0bn. Existing compute capacity is close to 1GW, and Baidu plans to double it within four to six quarters. As GPU cloud remains a sellers' market, we think most new capacity converts to revenue shortly once they are ready. The only concern or unproductive spend is foundation model training, which carries cost without revenue for the next two to three quarters. That is why management flagged 3Q26 as the low point for operating profit.
The rising GPU mix should improve cloud economics. GPU public and private cloud, together with Kunlunxin, already account for more than half of AI Cloud Infra revenue. Management reiterated a 35-40% long-term gross margin target for GPU Cloud – which could be reached in 2-3 years. We expect AI Cloud Infra to stop diluting group margins during 2027.
Advertising remains the main near-term earnings risk. Online marketing revenue fell 19%, and management expects competitive pressure from chatbots and social platforms to persist in 2H26. Baidu is also delaying the monetisation of AI search while it prioritises user experience. We estimate advertising still contributes around 60-70% of group operating profit, leaving earnings and cash flow sensitive to further weakness through FY26.
However, AI growth should outweigh the legacy decline from FY27. We forecast AI-powered Business to reach 60% in FY27F. By then, we expect the expanding AI revenue pool and improving cloud margins should be enough to offset the contraction in Legacy Business, supporting a return to group-wide growth. AI Applications are already profitable, but we expect only gradual growth until Baidu delivers a more competitive foundation model.
Forecast cuts reset near-term expectations. We cut FY26F-28F non-GAAP net profit by 25% each to RMB14.4bn/RMB16.4bn/RMB18.7bn. The revisions reflect three factors – (1) we now forecast Legacy revenue to decline 25%/18%/15%, with limited contribution from AI search monetisation, (2) we incorporate higher model-training expenses into R&D from 2H26 onwards, (3) we reduce our non-cloud AI growth assumptions.
Maintain BUY, TP lowered to HKD131/USD134. We roll forward to an FY26F/27F average and adopt more conservative assumptions. After assigning zero value to Legacy Business in last quarter, we now also assign no standalone value to AI Applications or AI-native marketing until growth and margin visibility improves. We roll forward Kunlunxin’s valuation to a lower 20x forward 12-month P/S multiple from 35x, (still benchmarking Cambricon with same 30% A-H discount). We also apply a 30% haircut to net cash and listed investments, reflecting higher capex and potentially slower buybacks, followed by a 20% conglomerate discount.
Current valuation is undemanding as our combined value for AI Cloud Infra and Kunlunxin already reached HKD113.
Key catalysts. The 2026 August EGM is the next milestone for the dual-primary conversion, which Baidu expects to complete within 2026. Based on NetEase’s recent precedent, Southbound inclusion could follow quickly after the conversion becomes effective, subject to exchange confirmation. The Kunlunxin IPO remains under confidential filing. Although the timetable appears later than previously expected, it remains an important value-unlock catalyst. Management has also maintained its commitment to a dividend before year-end.
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