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Chinese internet giant Baidu.com (BIDU) surpassed analysts' muted 4Q24 expectations, but that wasn't enough to stave off a sharp selloff in the stock as the company's bread-and-butter online advertising business continues to struggle under tough macroeconomic conditions. Furthermore, while BIDU's AI Cloud business generated solid revenue growth of 26%, concerns are mounting that its GenAI chatbot called "ERNIE" could lose momentum following the launch of DeepSeek's chatbot last month.

• Despite the strong growth in the AI Cloud business, Baidu Core revenue still fell by 7% yr/yr to RMB 17.9 bln, reflecting macro-related pressures and rising competition in the social media space. BIDU has been banking on its ERNIE chatbot to provide its advertising business with a competitive edge and revenue boost, but that hasn't played out in a substantial way just yet. The fact that a high percentage of BIDU's advertising customers are smaller, offline businesses doesn't help its cause.
• The emergence of DeepSeek has created another major challenge for BIDU, especially since its open source, causing BIDU to reverse its original plan of charging a fee to use ERNIE. Starting on April 1, BIDU will offer the ERNIE chatbot for free on both desktop and mobile phone platforms.
• These headwinds in BIDU's advertising business, which accounts for over half of the company's total revenue, are also impacting its margins and profits. Adjusted EBITDA margin decreased by six percentage points on qtr/qtr basis to 20%, and adjusted EPS dipped by 12% to RMB 19.18. During this rough stretch that includes three consecutive quarters of yr/yr revenue declines, BIDU hasn't let up in terms of investing in AI and autonomous driving technology. In Q4, capex came in at RMB 2.33 bln compared to RMB 1.65 bln last quarter.
• On the topic of autonomous driving, BIDU is seeing good momentum with its Apollo Go ride-hailing service. For Q4, Apollo Go provided over 1.1 mln rides, up 36% yr/yr, and strong growth should continue after BIDU secured permits to conduct autonomous driving tests in Hong Kong last November.

BIDU's sluggish online advertising business is clouding over the stronger growth of its AI Cloud business, which did have a strong quarter. However, concerns are mounting that DeepSeek and other emerging chatbots will derail BIDU's ambitious AI growth aspirations.