Is Baidu Fumbling It Again?

Why Baidu’s Early Moves Don’t Translate Into Long-Term Success

Introduction

A few years ago, the equivalent of the “Magnificent Seven” in the United States was the BAT stocks in China: Baidu BIDU 0.00%↑ , Alibaba BABA 0.00%↑ , and Tencent. These three companies were the top tech giants in China, leading the market and driving growth in the technology sector.

In recent years, Chinese tech stocks taken a heavy beating, but Tencent still holds the top spot in market capitalization by a large margin. Alibaba, despite its decline, ranks seventh, just behind major Chinese banks, Kweichow Moutai, PetroChina, and China Mobile.

Baidu, however, has fallen far behind. It now ranks 48th, just one spot ahead of Foshan Haitian Flavoring and Food, with a market cap that is only 6.7% of Tencent’s. This dramatic drop shows how far Baidu has fallen from its former position as a leading tech giant in China.

So, what is the reason for this decline, and is it justified?

Fundamentals:

On paper, Baidu appears very cheap. The company trades at a P.E. ratio of 11, with a forward P.E. of about 8. Additionally, Baidu has a strong balance sheet, with around 32% of its market cap held as net cash. These numbers suggest that buying a tech company with such cheap fundamentals could be a promising investment. It’s easy to understand why people might look at Baidu and think it’s a real bargain.

But when we look at Baidu’s revenue growth, there’s already reason for suspicion. Even before the tech crackdown, during the peak period for Chinese tech companies, Baidu’s growth was weak compared to its peers. While other major Chinese tech firms were experiencing rapid expansion, Baidu’s growth lagged behind.

The Illusion of Being the “Google of China”

When I talk to investors outside of China, I often see them trying to find a Western equivalent to frame their investments. Baidu is frequently compared to Google, and on the surface, this makes sense. Both started as major search engines, expanded into areas like maps with Baidu Maps and Google Maps, and are now involved in artificial intelligence—Google with Gemini and Baidu with ErnieBot. Both companies are also working on autonomous or self-driving cars. However, despite these similarities, the reality is very different.

Take, for example, the search engine business. While Google has established a near-monopoly outside of China, holding a dominant market share of about 90.48% globally, Baidu has never been able to achieve the same level of dominance in China. The search engine landscape in China is very different due to the presence of super apps like Tencent’s WeChat. Tencent and other companies made a strategic move by encouraging users to search within these super apps, gradually eroding Baidu’s market share. As a result, Baidu currently holds only around 61.11% of the search engine market share in China, significantly lower than Google’s dominance in other regions.

The Management Problem

The issue with Baidu’s management can be summed up by the saying in China:

起个大早，赶个晚集

which roughly translates to “Got up early but was late to the market.”

In my view, Baidu’s management team excels at identifying promising business opportunities earlier than many of their competitors. They are often the first movers in new markets or technologies. However, despite this early entry, they frequently fail to capitalize on their first-mover advantage. Over time, their competitors, with better execution and operating skills, tend to overtake them. This repeated inability to fully leverage early opportunities is a critical weakness in Baidu’s management.

Here are a few examples without going into too much details.

• Healthcare Apps: Baidu Health was an early player, but it collapsed after a huge scandal in 2016. Meanwhile, Tencent Health, Alibaba Health, and JD Health continue to grow.

• Self-Driving Cars: Baidu was one of the early entrants, but today it faces growing competition as more companies enter the autonomous vehicle market.

• Travel Booking Site: Baidu couldn’t make Qunar, their travel app, work and ended up selling it to Ctrip. Today, Ctrip has surpassed Baidu in market cap.

• Long-form Video: Baidu’s spin-off, iQIYI, has stagnated, now sitting at a market cap of around $2 billion.

• Baidu Maps: Once the leader, Baidu Maps was overtaken by Alibaba’s Gaode (高德), which has since become the preferred choice for users in China.

Let’s discuss one example in a bit more detail.

Artificial Intelligence

When OpenAI released ChatGPT, Chinese tech companies scrambled to develop their own large language models. Baidu was the first to release its model, ErnieBot, which garnered significant attention. However, other companies took a different approach. Rather than rushing to release a public-facing product, many focused on developing these models for internal use. Despite Baidu’s early lead, it quickly lost its first-mover advantage, as more options became available in China. Models like Tongyi Qianwen from Alibaba, Tencent’s Hunyuan, Moonshot AI’s Kimi and others began to emerge, creating a competitive landscape where Ernie no longer stood out.

An even clearer indication that Baidu has already lost its lead is in the text-to-video space. OpenAI was ahead with the release of its text-to-video model, Sora. However, in China, it wasn’t Baidu that led the way. Kuaishou was the first to release a publicly available text-to-video large language model, followed now by Douyin and other competitors.

Even more evidence of Baidu losing its lead can be seen in the business numbers. As I mentioned, other companies have been more focused on internal applications rather than public releases. For example, Tencent stated that the most immediate gains from large language models come from advertising, improving click-through rates and overall effectiveness. Tencent’s online marketing revenue grew by 19% last quarter, and for example Kuaishou saw an increase of 22%. In comparison, Baidu’s online marketing revenue decreased by 2% in the last quarter, indicating that their artificial intelligence efforts are not translating into improved advertising performance.

They’re Not Good First Movers, So Are They Any Better as Late Movers?

While Baidu has consistently struggled as a first mover, their attempts to enter markets as a late mover haven’t fared much better. One notable example is their effort to break into the short video and live streaming sectors. Their largest acquisition attempt in this space was YY Live, which they tried to purchase from Joyy YY 0.00%↑ for $3.6 billion, making it the biggest acquisition in Baidu’s history. Despite already operating the platform, the acquisition never closed due to regulatory intervention from SAMR. In hindsight, this was a fortunate windfall for Baidu investors, as they could not make any progress while operating YY Live. Luckily for Baidu, they are now allowed to dump the remains of YY Live back to Joyy, although the exact conditions for this are still unclear. In any case, this further illustrates that entering a market as a late mover or making acquisitions has not been Baidu’s strong suit.​

Baidu’s Negative Perception

Speaking of Baidu Maps: People hate Baidu Maps and don’t have a favorable view of the company as a whole. Baidu’s search engine operates on a pay-for-placement (P4P) model, where companies can pay to have their results prioritized, which leads to poor search quality. Users often have to sift through irrelevant, low-quality content before finding the information they need.

In contrast, other tech companies like Tencent, Meituan, Kuaishou, Douyin, Pinduoduo, and Alibaba are generally well-liked because they offer clear value to people’s daily lives. Personally I can’t imagine my life without Wechat and Meituan anymore.

(Apple, I’m looking at you—if your new iPhone 16 doesn’t support WeChat anymore, you’re not going to sell a single iPhone in China.)

Conclusion

In conclusion, there are clear pros and cons when evaluating Baidu. On the positive side, Baidu looks very cheap, trading at an attractive multiple and holding a significant amount of cash. Additionally, their management excels at identifying future opportunities earlier than most other companies in the Chinese tech sector.

However, the downside is that Baidu consistently struggles to capitalize on these early insights. They frequently lose their first-mover advantage to competitors with better execution. This pattern has repeated itself time and again, and I fear it’s happening now with artificial intelligence as well.

Happy Moon Festival

Today is the Moon Festival in China, and for me, that means indulging in tons of delicious food, especially mooncakes.

In Chinese folklore, the Moon Goddess Chang’e lives on the moon with her companion, the Jade Rabbit, who spends his time making an elixir of immortality.

There’s the superstition that if you point your finger at the moon during the Moon Festival, Chang’e will come down at night and cut off your ears.