Baidu has signaled in its latest earnings report that its core business is struggling, so investors should steer clear of the stock, according to Morgan Stanley. The investment bank downgraded the internet search name to underweight from equal-weight. It also lowered its price target on shares to $80 from $130, suggesting 12% downside from Tuesday’s close. “[Third-quarter] AI cloud infra revenue [is set] to accelerate [quarter over quarter], but [the] core ads business remained weak at -18.5% [year over year], with limited recovery in [the second half of the year],” analyst Gary Yu said Wednesday in a note to clients. “Core [operating profit] should decline further [quarter over quarter] and hit a trough in [the third quarter] with heightened investments in talent acquisition, Ernie [AI] model upgrade, and computing expansion in [the second half of the year].” Baidu on Tuesday reported weaker-than-expected financial results for the second quarter, leading its stock to drop more than 12%. Earnings per average diluted share came in at 7.22 yuan (US$1.07), which was well below the 9.35 yuan (US$1.38) per EPADS expected by analysts polled by FactSet. The company also posted revenue of 31.33 billion yuan (US$4.64 billion), or below the Street’s consensus estimate of 31.78 billion yuan (US$4.71 billion). Yu noted that the Chinese firm’s considerable investments into AI, which have dragged on its earnings, may eventually pay off, but they likely won’t translate into meaningful growth for a while. “AI monetization is still at an early stage,” Yu wrote. “AI monetization will take time to be meaningful to financials.” The analyst also said that Baidu’s core business is likely to continue to struggle as ad recovery lags, and it’s unclear how long it will take for things to turn around. Morgan Stanley’s call goes against consensus on Wall Street. Of the 32 analysts covering Baidu, 27 have a buy or strong buy rating on the stock, while just one has a sell on it, LSEG data shows. Shares have fallen roughly 30% year to date.
