Shares of Baidu (BIDU -12.85%) fell sharply on Tuesday, falling as much as 11.6%. As of 11:32 a.m. ET, the stock was still down 11.4%.
The catalyst that sent the Chinese tech giant lower was news that its heavy investment in artificial intelligence (AI) isn't paying off quickly enough for Wall Street.
Image source: Getty Images.
Heavy investment, little return
Baidu reported its second-quarter results, and to say investors were disappointed might be putting it mildly. Revenue of RMB 31.3 billion (roughly $4.62 billion) fell 4% year over year, with declines across the major operating units. Revenue from its general business declined 3% to $3.71 billion, while revenue from iQIYI -- its majority-owned streaming service -- slipped 5% to $927 million.
If the top-line results were disappointing, the bottom line was doubly so. Diluted earnings per American Depository Share (ADS) of RMB 5.74 (about $0.85) plunged 72%.
For context, analysts' consensus estimates called for revenue of RMB 31.95 billion and earnings per ADS of RMB 9.84, so Baidu missed expectations by a country mile.
NASDAQ: BIDU
Key Data Points
Perhaps most concerning was that the company's legacy ad business continued to struggle, as online marketing revenue fell 19% year over year.
There were some green shoots, as Baidu's AI-powered core business grew 25% year over year, driven higher by its AI cloud, which jumped 50%. AI applications edged 3% higher, while its AI-based marketing services were flat.
Baidu continues to invest heavily in its AI-powered future, with capital expenditures (capex) of RMB 11.4 billion (about $1.68 billion), triple the RMB 3,800 it spent in the prior-year quarter. It's clear investors had hoped that spending of that magnitude would yield more impressive results.
At 71 times trailing-12-month earnings, Baidu is selling for a premium. However, at just 13 times forward earnings, it represents a high-risk, high-reward proposition. Let the buyer beware.
