Baidu's Stock Faces Turbulence Amid Rapid Autonomous Driving Expansion in China

China’s rapid adoption of autonomous driving technology is doing little to boost optimism among analysts searching for Baidu Inc.’s next growth catalyst. The internet search leader’s shares have nearly erased their gains in Hong Kong this month after announcing an expansion into ride-hailing with a fleet of fully self-driving cars in Wuhan. With analysts lowering Baidu’s average 12-month target price to an all-time low, the stock may continue its year-to-date decline.

“The stock price has not priced in robotaxi potential. But to be honest, it shouldn’t right now either because no one really knows how successful it will be, nor do they know about future government policy toward the technology,” said Kai Wang, a Morningstar analyst. “Mass commercialization is still like three to five years away.”

A major concern is whether Baidu’s new growth plans will quickly offset its declining advertising revenues, especially given uncertainties surrounding pending regulations and consumer demand for autonomous vehicles. Market competition and a weak macroeconomic environment may also weigh on the stock.

Analysts Predict Declining Market Share and Earnings Losses

Autonomous driving and machine learning have been key components of Baidu’s broader ambitions in the artificial intelligence sector. Its autonomous ride-hailing arm, “Apollo Go,” launched an affordable robotaxi model in May, aiming to become profitable by next year. Baidu plans to expand this service beyond Wuhan to more Chinese cities. In April, the company signed an agreement with Tesla Inc. to integrate its maps into Tesla’s self-driving systems.

However, these efforts have yet to sway market watchers. Bloomberg Intelligence analyst Robert Lea noted that Baidu might lose market share in AI due to a price war, predicting a potential double-digit sequential decline in earnings this year as its AI ventures continue to incur losses.

Regarding robotaxis, a Shanghai operations case study revealed “discouragingly deep loss-making financials,” according to JPMorgan Chase & Co. analysts, including Alex Yao. They argue that discounts offered by Baidu make the strategy commercially unviable.

Baidu Faces Growing Concerns and Market Challenges

These concerns have prompted at least seven brokers, including Goldman Sachs Group Inc. and Morgan Stanley, to reduce their price targets for Baidu over the past two weeks.

Baidu’s operations in Wuhan are also under increased scrutiny. Local media have raised concerns about rising unemployment among taxi drivers and the safety of autonomous cars in complex traffic situations.

Despite these challenges, China’s driverless ride-hailing market potential remains significant for Baidu’s long-term growth plans. According to Goldman Sachs, the country currently operates about four to five million ride-hailing cars. If 5% of these vehicles transition to self-driving technology and offer pricing comparable to traditional taxis, the market could be worth $5 billion.

Recently, at least six cities or provinces announced trials to promote autonomous driving, potentially boosting demand.

For now, the next catalyst will likely come during Baidu’s earnings report next month. According to Bloomberg data, the company is expected to report 1.2% revenue growth for the second quarter, similar to the pace of March, which has been slow since 2022. After a brief surge in demand for bullish option contracts following Baidu’s Wuhan expansion announcement, trading volume has quickly subsided.

“Robotaxis are unlikely to generate any significant revenue or earnings for Baidu over the next few years,” BI’s Lea said, adding that earnings might show a double-digit sequential decline this year. “The technology is high-risk and remains immature, with developmental hurdles yet to overcome.”