Can Apple and AI make Baidu cool again?

Apple has long been the epitome of tech cool: sleek design, ease of use, and a legion of fans. Baidu, China's answer to Google, is less so and has been lagging in growth for years.

But the artificial intelligence boom could change that. In addition to its existing collaboration with Samsung, the company has been in exploratory talks with Apple about using chatbot technology in China. And AI cloud revenues are starting to inflate that top line.

Once considered one of China's leading tech companies, which together with Alibaba and Tencent make up the so-called BAT, Baidu lagged behind the other two in terms of growth and stock price performance in the mid-to-late 2010s.

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But while its peers stumble over regulatory and political hurdles, Baidu may have finally found a way to outperform them. The frenzy started by ChatGPT spawned many clones in China, and Baidu has been investing in AI for years, so it's no surprise that it released its own version last year called Ernie Bot.

And Arnie seems well positioned to stay ahead of the competition. Samsung is already using Ernie to power some of its latest Galaxy phones' AI features in China. Apple may also be looking at technology for iPhones and Macs in China. The newspaper reported last week that the two companies held preliminary talks on the matter. Apple itself has not yet confirmed the talks, and a Chinese state-run newspaper on Tuesday reported that no deal had been reached so far. Baidu declined to comment.

Needless to say, it helps that the likes of ChatGPT and Google's Gemini are not allowed in China. However, if Apple's support is realized, Ernie Bott's leading position in the country will be solidified.

As with other generative AI chatbots, Baidu faces the challenge of finding the best way to monetize Ernie, especially given the high cost of training such models. Masu. The company says generative AI helps improve the search experience and increase advertising revenue.

Providing AI services to cloud customers provides more immediate and quantitative benefits. Baidu earned 656 million yuan (equivalent to $91 million) in AI-related cloud revenue in the fourth quarter. This amount is still fairly small at only 2% of Bydus' total revenue for the quarter, but it is growing rapidly. Baidus CEO Robin Li expects AI-related revenue to grow to billions of yuan this year. One of the key factors, he said, is whether the company can migrate more developers, especially those focused on AI, to Bydus' cloud services.

Vidas shares are trading cheaply by U.S. standards at about 10 times expected earnings over the next 12 months. The company's flagship advertising business faces stiff competition from Alibaba, Tencent and Douyin, the fast-growing Chinese version of TikTok.

However, the company's core business remains a cash cow. Baidu generated about $3 billion in free cash flow last year and currently has about $18 billion in net cash and short-term investments, nearly half of its $37 billion market capitalization.

If Baidu continues to find new ways to monetize its AI leadership while keeping costs down, investors may finally start to take notice again. It would be a dramatic reversal of fortunes for Baidu, once the ugly duckling of China's Big Tech companies.

Email Jacky Wong at [email protected].

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