Chinese tech giant Baidu (BIDU) recently announced its Q3 earnings, surpassing muted expectations, but the true focus is on its latest AI chatbot, ERNIE 4.0, which was launched last month. While revenue growth has slowed amid macroeconomic challenges, ERNIE 4.0 is now gaining attention and could become a significant revenue driver for the company. In this article, we delve into Baidu’s Q3 performance and the potential impact of ERNIE 4.0 on its future.
ERNIE’s Evolution
When Baidu introduced ERNIE as its response to OpenAI’s ChatGPT in February, it failed to make a significant impression on the public and investors. The company’s decision to offer only a pre-recorded video of ERNIE without a live demo raised doubts about its capabilities compared to ChatGPT.
However, after several upgrades, ERNIE 4.0 now appears ready for prime time. Baidu has begun charging a small monthly fee to use ERNIE 4.0, which is integrated into various Baidu products, including maps, file sharing, and search. While this revenue was not included in Baidu’s Q3 results, ERNIE is expected to contribute significantly to the company’s topline in Q4. During the earnings call, Baidu projected that ERNIE would help generate “hundreds of millions of yuan in additional ad revenue” in the fourth quarter.
Seeking a Growth Catalyst
Baidu’s core business of online search and advertising has been facing challenges. In Q3, revenue for Baidu Core increased by just 5% to RMB 26.6 billion, a significant drop from the previous quarter’s growth rate of 14%. The growth in new monthly active users was also modest at 5%, totaling 663 million.
Besides macroeconomic pressures, Baidu is grappling with intensified competition from tech giants like Alibaba (BABA) and ByteDance, both of which have been gaining market share in recent quarters.
Export Control Concerns
While Baidu did not echo Alibaba’s concerns about sourcing chips for AI technology due to U.S. export controls, these restrictions pose a potential risk as the company looks to expand its AI investments.
Bottom-line: Baidu’s Q3 performance presented a mixed picture as the company comfortably exceeded EPS estimates, despite decelerating revenue growth. However, the excitement surrounding Baidu’s AI growth opportunities, particularly driven by ERNIE 4.0, is buoying the company’s stock. With ERNIE poised to contribute significantly to ad revenue in Q4, Baidu’s future in the AI landscape looks promising. As Baidu continues to navigate challenges in its core business and the competitive tech industry, its success in the AI sector could be the key to sustained growth and investor optimism.
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