Baidu: MS downgrades to ‘equal-weight’ on weak ads, sluggish AI monetization

Investing.com-- Baidu Inc (HK:9888) (NASDAQ:BIDU) was downgraded by Morgan Stanley on Friday, with the brokerage citing a weak outlook for the Chinese internet firm’s advertising revenues, while monetization of its artificial intelligence forays is also expected to take time.

Morgan Stanley downgraded Baidu’s American shares to “equal-weight” from “overweight”, and also trimmed its price target to $125 from $140. The new PT represents an upside of 11% from current levels.

The downgrade comes after Baidu clocked some softer earnings for the first quarter, especially as weak Chinese economic conditions weighed on its core advertising revenues. 

The firm, which is China’s biggest internet search engine, saw some boosts to revenue from its AI measures- specifically its ChatGPT-like Ernie bot and from AI-driven demand for its cloud services. But this was also offset by much higher expenses on Baidu’s AI development. 

Morgan Stanley analysts said weakness in Baidu’s ads division was set to continue, and that transformation of its traditional businesses into AI offerings was “slow and lagged on user retention.”

Growth in Baidu’s cloud services is set to improve, Morgan Stanely said, citing increased demand from AI-linked enterprise-level partnerships. The firm’s margins are also expected to remain largely stable, with capex expected to have peaked in 2023 with the procurement of AI-related chips and the scaling down of less profitable units.

Baidu is trading up about 17% so far in 2024 on hype over its AI offerings. But Morgan Stanley said it saw limited near-term catalysts for further gains. 

The firm has made several attempts to diversify beyond its core ads and search engine revenues. Recently, it announced a partnership with electric vehicle maker Tesla Inc (NASDAQ:TSLA), under which its maps data and AI software will be used for navigation by Tesla vehicles in China.