Baidu has finally established AI as its primary revenue driver, yet the capital markets remain unimpressed.

Recently, Baidu unveiled its financial results for the second quarter of 2026, sparking widespread attention in the market.

Total revenue for the quarter reached RMB 31.33 billion, a 4% decrease year-on-year. Net profit attributable to the parent company's shareholders plummeted to RMB 2.319 billion, marking a 68% decline from the same period in 2025. Online marketing revenue stood at RMB 13.1 billion, down 19% year-on-year. Following the announcement, Baidu's U.S.-listed shares dropped approximately 7% during intraday trading.

While plummeting profits are concerning, they are not the primary issue at hand.

Baidu's AI-driven revenue within its general business surged to RMB 12.5 billion, up 25% year-on-year, accounting for roughly 50% of the total. This marks the second consecutive quarter of AI dominance. From a revenue structure perspective, Baidu is evolving beyond a search advertising company. However, in terms of profitability, the new growth engine has yet to fully offset the decline of the traditional business.

Online reports suggest that Li Yanhong described these financial results as Baidu's AI transformation "coming-of-age ceremony."

After thorough verification, it appears that the term "coming-of-age ceremony" is more of a media interpretation rather than a direct quote from the financial report announcement or earnings call.

What Li Yanhong actually conveyed was that the sustained growth of the AI business underscores Baidu's shift from an internet-centric company to an "AI-first" entity. He also emphasized the need to elevate the Wenxin large model to a leading position.

Why do the media favor the term "coming-of-age ceremony"? Because AI revenue constituting half of Baidu's general business for two consecutive quarters means this sector can no longer rely on "future potential" as an excuse.

Once revenue surpasses the halfway mark, market evaluation criteria shift. Previously, model parameters, product launches, and technical narratives were key considerations. Now, customer retention, gross margins, cash flow, and external revenue are under scrutiny.

The true coming-of-age milestone is not when revenue barely exceeds 50%, but when the new business begins to shoulder responsibility for its own profits and cash flow. By this measure, Baidu has reached a critical juncture but has not yet fully matured. Li Yanhong, a seasoned leader, remains composed amid the current business landscape.

During past product launches, he maintained his calm even when unexpectedly doused with water.

The RMB 5 billion profit decline cannot be solely attributed to AI investments

Baidu's net profit attributable to the parent company in Q2 fell from approximately RMB 7.3 billion in the same period last year to RMB 2.3 billion, a decrease of about RMB 5 billion. Blaming this entire decline on R&D investment would be an oversimplification.

The first layer of pressure stems from the legacy business. Online marketing revenue decreased by 19% year-on-year, a reduction of about RMB 3.1 billion. Search advertising remains Baidu's high-margin, cash-generative sector, and its contraction not only affects revenue but also alters the gross margin of the entire business portfolio.

Since the Wei Zeixi incident in 2016, Baidu has implemented certain regulations regarding search advertising promotions. However, there is still ongoing debate about ensuring the authority and professionalism of product searches.

AI search provides users with more direct answers but reduces traditional webpage clicks and ad placements. Baidu is revamping its old products with new ones while also altering its revenue collection methods.

The second layer of pressure arises from the revenue structure. AI cloud infrastructure revenue reached RMB 7.3 billion, up 50% year-on-year, with GPU cloud revenue surging by 283%, the brightest spot in the financial results.

However, cloud infrastructure is inherently more capital-intensive than mature advertising, requiring substantial investments in servers, chips, data centers, and ongoing depreciation. AI application revenue stood at RMB 2.5 billion, up only 3%. This indicates that Baidu's strongest AI growth currently comes from selling computing power and enterprise infrastructure, while high-margin, scalable monetization of consumer applications has yet to take off.

The third layer of pressure comes from the decline in non-operating income. Baidu's other net income for the quarter was only RMB 184 million, compared to RMB 4.9 billion in the same period last year, mainly due to a decrease in fair value gains from long-term investments and foreign exchange losses. This year-on-year change alone accounts for nearly RMB 4.7 billion. Additionally, income tax expenses for the quarter were approximately RMB 1 billion, higher than the approximately RMB 880 million in the same period last year.

Thus, the true drivers of the profit decline are: the shrinking of the advertising cash cow, the AI business still in a heavy investment phase, and a high investment gain in the same period last year raising the base. The combination of these factors resulted in the 68% decline.

The capital markets had already anticipated this and had already responded accordingly.

Baidu's R&D spending is substantial; the issue lies in financial resource constraints

Baidu's R&D expenses in Q2 were RMB 4.6 billion, down 10% year-on-year, accounting for about 14.7% of revenue. This proportion is not low, even surpassing Alibaba's approximately 8.4%, Tencent's approximately 13.3%, and JD.com's approximately 2.1%. However, the absolute amount gap is significant.

Tencent's R&D spending for the quarter was RMB 27.28 billion, Alibaba's was approximately RMB 22.53 billion, and JD.com's was RMB 7.3 billion. Baidu's was only RMB 4.6 billion. Baidu's R&D intensity is high, but its R&D depth is constrained by its revenue scale. It faces a daunting challenge: waging a full-stack war of foundational models, AI applications, and computing infrastructure while competitors benefit from thicker cash flows from gaming, e-commerce, payments, and advertising.

More notably, R&D expenses are only part of the AI bill. Baidu's capital expenditures in Q2 were approximately RMB 11.39 billion, accounting for about 36% of quarterly revenue.

R&D expenses affect current profits, while capital expenditures are gradually reflected through cash flow and future depreciation. Focusing solely on the RMB 4.6 billion in R&D expenses underestimates the true cost of Baidu's AI transformation.

Baidu's strategy is clear. At the foundational level, it leverages Kunlunxin to reduce computing power dependence. In the middle layer, it utilizes Wenxin and intelligent cloud services for enterprises. At the top, it employs search, Wenku, Netdisk, digital humans, and Apollo Go to identify application entry points.

This full-stack layout is technically sophisticated, and the collaborative logic holds. However, the battle lines are too long.

Currently, the output shows clear differentiation. GPU cloud growth is rapid, proving that enterprises are willing to pay for computing power. The penetration rate of AI functions in Wenku and Netdisk increased by 27.4% year-on-year, indicating effective transformation of old products. Apollo Go continues to globalize, bringing long-term imagination.

On the other hand, AI application revenue grew by only 3%, Wenxin still needs to catch up to the leading tier, and AI-native marketing must address the conflict between user experience and commercialization.

What Baidu lacks now is not AI stories or product launches but several high-quality results that can significantly alter its profit statement. After attending numerous Baidu product launches, the author still recalls Li Yanhong being doused with water, as no product has left a lasting impression.

Cloud revenue growth is important, but if it relies heavily on capital-intensive investments, faster revenue growth may also increase cash pressure. AI applications having users is important, but if payment rates and average transaction values remain low, popularity will not translate into profits.

Kunlunxin IPO

Baidu's most closely watched capital move currently is the spin-off and listing of Kunlunxin. The company confidentially submitted its listing application to the Hong Kong Stock Exchange in January 2026 and initiated listing counseling for the Sci-Tech Innovation Board in May.

Baidu announced that after the spin-off, Kunlunxin is expected to remain a Baidu affiliate, with specific issuance size and equity dilution yet to be determined.

Kunlunxin's advantages are clear. It emerged from Baidu's internal real business scenarios, not just as a lab chip. Baidu Cloud can cater to both training and inference needs while assisting with chip software adaptation, cluster verification, and commercialization. The rising demand for domestic computing power also provides an opportunity to expand external customers.

However, its fundamental challenges are equally clear.

The first is customer concentration. Kunlunxin has long served Baidu deeply, and while external sales are expanding, whether it can form an independent, diversified, and sustainable customer structure is key to market valuation.

The second is supply chain and manufacturing processes. AI chips compete not just on design but also on advanced manufacturing, packaging, interconnectivity, software ecosystems, and stable delivery.

The third is capital intensity. Chip iteration is rapid, and both R&D and production capacity guarantees require long-term investment. Going public can replenish funds but also means the market will more rigorously question revenue, gross margins, and loss reduction paths.

Public reports have mentioned a target valuation of USD 50 billion, but Baidu has not confirmed this, and Reuters has stated it cannot independently verify it. This figure can be understood as market expectation, not confirmed fact.

A more prudent reference is that Kunlunxin's latest funding round valued it at approximately RMB 21 billion. Whether its valuation can significantly jump ultimately depends on external revenue, product competitiveness, and profit visibility.

The spin-off and listing have three layers of significance for Baidu. First, it allows the capital markets to price the chip assets separately, alleviating the issue of Baidu's overall valuation being dragged down by traditional advertising business. Second, it establishes an independent financing channel for Kunlunxin, reducing the parent company's sole burden of capital expenditures. Third, it attracts talent and customers through independent governance.

However, a spin-off is not a panacea. It can place assets into a new valuation framework but cannot replace fundamentals.

Sending loss-making or heavy-investment businesses to go public merely shifts pressure from one financial statement to another. Technology, orders, and profits ultimately determine value.

Baidu's greatest challenge is not transformation but completing two overhauls simultaneously

This financial report should not be simply dismissed as "Baidu falling behind" nor packaged as "AI transformation already successful."

Baidu is undertaking two very difficult tasks at once. One is transforming search from link distribution to answers and intelligent agents; the other is shifting the company's revenue from advertising to cloud, applications, chips, and autonomous driving.

The former actively weakens the old business model, while the latter requires massive investment. The rapid decline of old profits and the slow growth of new profits mark the most painful stage of transformation.

What deserves recognition is that Baidu's AI revenue has reached RMB 12.5 billion, and the growth of GPU cloud and AI cloud infrastructure is real, not just conceptual. It also possesses a complete chain from chips, models, cloud to applications, still rare among domestic internet companies.

What requires caution is that completeness does not equal strength, being first does not equal leadership, and revenue exceeding half does not equal a closed profit loop.

Baidu must contract its battle lines and concentrate resources on the areas most likely to generate scalable profits. For investors, four future figures matter more than product launches: whether the decline in online marketing narrows, whether AI applications can reaccelerate, whether AI cloud gross margins improve, and whether capital expenditures can convert into free cash flow.

The so-called

Just as Li Yanhong maintained his composure when unexpectedly doused with water on stage, he must also face any challenges ahead with the same calmness, thereby instilling greater confidence in the market regarding growth prospects. This is precisely what the market eagerly awaits.

Baidu has demonstrated that AI can be a revenue-generating force. The next crucial step is to show that these revenues can offset the expenses associated with computing power, depreciation, research and development, and customer acquisition, ultimately resulting in sustainable profits.

Only when this milestone is achieved can Baidu's AI transformation be deemed truly mature.

The indicators are beginning to surface; with time, they will become more apparent.