Baidu third-quarter earnings preview: Cloud growth accelerates, while advertising and depreciation weigh on profit
JPMorgan has lowered its earnings forecasts for Baidu for this year and next, but maintains its Overweight rating. The key question is whether GPU cloud can convert demand for computing power into cash received in advance while offsetting pressure from declining advertising revenue and capital spending.
Original source：J.P. MorganFirst published on Unhidea：Original source date：
Key takeaway
JPMorgan’s positive view of Baidu continues to rest on GPU cloud, Kunlunxin and the value of its cash, but cloud revenue growth is not yet sufficient to offset the pressure on current profit from the loss of high-margin advertising revenue, depreciation and training investment.
Can cloud fill the revenue gap left by advertising?
JPMorgan expects Baidu’s AI cloud infrastructure revenue in the third quarter of 2026 to be approximately 8 billion yuan, up about 90% year on year and 10% quarter on quarter, accelerating from year-on-year growth of 50% in the second quarter. The year-on-year increase in cloud revenue of approximately 3.7 billion yuan could cover the approximately 3.1 billion yuan year-on-year decline in online marketing, bringing Baidu’s general business revenue back to slight year-on-year growth.
The 90% year-on-year growth includes the effect of a low base: in the third quarter of 2025, cloud infrastructure revenue fell to 4.2 billion yuan from 4.9 billion yuan in the preceding quarter. The bank therefore places greater emphasis on the approximately 10% quarter-on-quarter growth and has not reinstated the cloud business’s previously removed growth premium relative to peers.
Why might profit still hit a low as revenue stabilizes?
JPMorgan expects third-quarter group non-GAAP operating profit of approximately 1.6 billion yuan, down 27% year on year, more than halved from approximately 3.8 billion yuan in the second quarter, and at its lowest point of the year. Lower high-margin advertising revenue, increased depreciation from second-quarter capital spending of 11.4 billion yuan, and higher spending on data, talent and computing power for model training are together depressing profit.
Advertising weakness is also related to changes in search: AI answers occupy space on the page, squeezing advertising slots and increasing computing costs, while Baidu has deferred monetization to protect the user experience. The bank expects advertising revenue to keep falling into the fourth quarter; profit margins are expected to recover then, but continued advertising weakness will leave them below second-quarter levels.
How can cloud growth turn into cash more quickly?
The bank believes demand for high-end GPU cloud is growing faster than supply, giving suppliers with high-quality computing capacity greater leverage on pricing and payment terms. Customers are more willing to pay in advance, and contract terms have lengthened from about one year to two or three years, allowing cash to arrive before services are delivered.
Baidu can also transfer computing capacity acquired earlier at lower prices, some of which was originally intended for internal use, to external customers, without requiring an equivalent amount of new capital spending for the additional revenue. But long-term contracts may lock in prices below future spot prices, and rising storage costs will also squeeze profit if they cannot be passed on.
Does lower capital spending mean cash pressure has eased?
Actual capital spending in the second quarter was 11.4 billion yuan, well above operating cash flow of 3.4 billion yuan; total borrowings rose by approximately 14 billion yuan in the first half. JPMorgan expects third-quarter capital spending to fall below 8 billion yuan, operating cash flow to be positive for a fifth consecutive quarter, and advance payments to fund part of procurement costs.
The bank sees no need for equity or convertible bond financing and maintains a 20% discount in its net cash valuation. However, positive operating cash flow is still some way from covering investment spending: in its full-year 2026 model, operating cash flow is approximately 26.4 billion yuan and capital spending approximately 30.3 billion yuan.
If third-quarter AI cloud infrastructure capital spending is below 7 billion yuan, the bank will use whether GPU cloud revenue growth can exceed 100% to assess whether the reduction in spending reflects improved capital efficiency or weakening demand.
Why maintain an Overweight rating after steep earnings cuts?
JPMorgan has cut its non-GAAP net profit forecasts for 2026 and 2027 by 15% and 42%, respectively, citing further advertising weakness and a more pronounced effect of higher capital spending on depreciation in 2027. Its price target for June 2027 falls from 175 US dollars to 145 US dollars, and its Hong Kong share target from 170 Hong Kong dollars to 140 Hong Kong dollars; it maintains its Overweight rating.
AI-native marketing and traditional search, the main areas affected by the earnings cuts, account for only about 13% of the bank’s sum-of-the-parts valuation; cloud, Kunlunxin and net cash together account for more than 80%, explaining why the rating is unchanged. Kunlunxin confidentially filed an application for a Hong Kong listing in January 2026, but there is no public timetable, and the bank’s valuation does not factor in a specific listing date or a distribution of interests to Baidu shareholders.
