"Apple has long been the epitome of tech-sector cool -- sleek design, usability and legions of devotees. Baidu, China's answer to Google, not so much. It has been a growth laggard for years.
But the artificial-intelligence boom might change that. The company held exploratory talks with Apple over using its chatbot technology in China, on top of an existing cooperation with Samsung. And AI-cloud revenue is starting to pad its top line.
While once seen as one of China's leading tech companies -- making up the so-called BATs along with Alibaba and Tencent -- Baidu dropped behind the other two in terms of growth and share price performance in the mid- and late 2010s.
But as its peers stumble over regulatory and political roadblocks, Baidu may have found a way to outperform them. The frenzy kicked off by ChatGPT spawned many clones in China and Baidu has long invested in AI, so it is only natural that it launched its own version called Ernie Bot last year.
And Ernie seems well placed to stay ahead of its competition. Samsung is using Ernie to power some AI features in China for its newest Galaxy phone. Apple may be eyeing the technology for its iPhones and Macs in China.
The companies have held preliminary talks on the subject. Apple has yet to confirm the talks and a Chinese state-owned paper on Tuesday said a deal hasn't been reached. Baidu declined to comment.
Needless to say, the fact that the likes of ChatGPT and Google's Gemini aren't allowed in China helps. But Apple's endorsement, if it materializes, would cement Ernie Bot's leading position in the country.
As is the case for other generative AI chatbots, Baidu faces the problem of finding the best way to make money from Ernie, especially given the high costs of training such models. The company says generative AI helps improve its search experience and drive advertising revenue.
A more immediate, quantifiable benefit comes from offering AI services to its cloud customers. Baidu made 656 million yuan, the equivalent of $91 million, in the fourth quarter from AI-related cloud revenue. That amount is pretty small -- 2% of Baidu's total revenue in the quarter -- but it is growing fast. Robin Li, Baidu's chief executive, expects AI-related revenue to grow to several billion yuan this year. One key factor is whether the company can attract more developers, particularly those focusing on AI, to move to Baidu's cloud services.
Baidu's stock has been trading cheaply by U.S. standards -- around 10 times next 12 months' forecast earnings. Its main advertising business faces strong competition from Alibaba, Tencent and fast-rising Douyin, the Chinese version of TikTok. But its core business remains a cash cow. Baidu generated around $3 billion of free cash flow last year and is sitting on about $18 billion of net cash and short-term investments, equal to nearly half of its $37 billion market capitalization.
If Baidu continues to find new ways to make money out of its AI leadership, while keeping costs down, investors may finally begin to take a look again. That would be a dramatic reversal of fortune for Baidu, the onetime ugly duckling of Chinese big tech companies." [1]
1. Can Apple and AI Make Baidu Cool Again? Wong, Jacky. Wall Street Journal, Eastern edition; New York, N.Y.. 28 Mar 2024: B.13.
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