Baidu Stock Plunges as Ernie Overspending Erodes Q4 Profits

On Wednesday, Baidu shares sank on poor fourth-quarter earnings results, driven by expanded spending on the Ernie chatbot and other AI projects.

The Chinese tech company’s stock slid 8.05% to $103.31 per share on February 28, its biggest drop since October 2022. However, industry experts anticipate a 0.22% rebound to $103.54 apiece on the following trading day.

Baidu’s Q4 earnings per share stood at 21.86 yuan ($3.04), surpassing analysts’ projection of 17.58 yuan ($2.44) by a significant 24.35%. This figure represents a substantial year-over-year (YoY) growth of 43.34% from Q4 2022 ‘s EPS of 15.25 yuan ($2.12).

In contrast, its October-December revenue of 34.95 billion yuan ($4.86 billion) fell 0.54% short of the market consensus of 35.14 billion yuan ($4.88 billion). Nevertheless, it still marked a 5.59% YoY increase from 33.10 billion yuan ($4.60 billion) in the same quarter the previous year.

Consequently, the 48.00% YoY contraction in GAAP net income from 4.95 billion yuan ($0.69 billion) to 2.60 billion yuan ($0.36 billion) overshadowed EPS and revenue growth. Baidu reported an 11.00% jump in research and development costs compared to Q3 2023, caused primarily by surging server fees.

The Beijing-headquartered AI and internet firm expanded its servers to support the testing of generative AI (GenAI) technologies. Founder and CEO Robin Li justified the spending, saying the company produced enough advanced AI training chips to support Ernie’s advancements over the next year or two.

Ernie to Position Baidu at the Core of Chinese AI

Li expressed confidence that Ernie will do for Baidu what the Chat Generative Pre-trained Transformer (ChatGPT) did for OpenAI. Shortly after ChatGPT’s release, OpenAI sparked the GenAI arms race, selling LLMs to major brands, including Microsoft, Salesforce, and Snap.

In addition, Li touted that Ernie users have surpassed 100 million, gaining a lead over competitors Tencent, Alibaba, and ByteDance. Furthermore, Baidu allotted 1.00 billion yuan ($138.97 million) to fund local developers of AI-native applications.

Launched in August 2023, the Ernie AI chatbot was part of the first batch of GenAI applications to receive approval from the Chinese government. Beijing’s guidelines require GenAI companies to align with the core values of socialism and use only government-approved training data.