Baidu has become the cheapest stock among China's internet giants. What's wrong with it?

The sharp underperformance of Baidu's stock against its competitors has led to the fact that this Chinese equivalent of Google is now trading at the lowest valuation among China's largest Internet companies. Investors are concerned about Baidu's competitiveness in artificial intelligence, as well as the high costs the company incurs in trying to catch up with AI market leaders.

Baidu shares fell 3% in Hong Kong on the morning of August 21 after reporting the strongest drop in quarterly sales in more than three years. As a result of this drop, the stock trades at a forward P/E multiple of 9.7, the lowest among profitable companies in the Hang Seng Tech Index. That's even cheaper than shares of troubled real estate developer Longfor Group, which trades at a multiple of 11, Bloomberg writes.

Hong Kong's tech index has soared 24% since the start of 2025, thanks to a boom in AI. Baidu's shares have risen just 3% in that time.

"The company's Internet search engine, once a major source of revenue, now faces stiff competition from [social video platforms] Xiaohongshu and Douyin," said Eric Shen, an analyst at research firm Third Bridge. - These competitors have created livelier and more engaging content ecosystems that draw users away from Baidu's more static Web services."

On the evening of August 20, Baidu reported that its revenue last quarter fell 4% year-on-year to 32.71 billion yuan ($4.6 billion), mainly due to a slowdown in its key Internet search segment. Analysts on average had forecast quarterly sales of 32.76 billion yuan, Reuters reported, citing LSEG data. Bloomberg attributes Baidu's biggest drop in revenue since 2022 to the country's economic slowdown, which has limited the ability of China's Internet search market leader to compete with larger AI players and explore new areas.

"As the monetization of AI search is still at a very early stage and has not yet reached the scale we need, our revenue and margins are under significant pressure in the short term, with the third quarter promising to be particularly challenging," Baidu CFO Henry He admitted to investors.

Baidu expects its Ernie chatbot to form the basis of its AI ecosystem and stimulate demand for the services of its cloud division, whose sales have been growing at double-digit rates in recent quarters, Bloomberg writes. However, the company faces competition in its home market from Alibaba and Tencent, which have significantly more resources and global presence, as well as from more agile startups, the agency notes.

According to the MarketScreener website, only Nomura has updated its recommendations on Baidu shares this summer. The Japanese investment bank lowered its target price for Baidu's American Depositary Receipts (ADRs) traded on Nasdaq to $93 from $95 per paper with a "neutral" rating. FactSet' s consensus rating for Baidu's ADRs has been "above market" (Overweight, consistent with a buy recommendation) in recent months.

This article was AI-translated and verified by a human editor