To The Moon

1. Lead / Setup 📊

Tiger Research Team maintains BUY rating and increases Price Target to $160 (from $150) as $$Baidu, Inc.(BIDU)$$ reports a strong 1Q26 that reinforces the view that the company is increasingly transitioning from a legacy search/advertising business into an AI infrastructure and application company. Headline revenue of RMB32.1bn was 2% above consensus and 5% above their estimate, while GAAP operating income, EBITDA and non-GAAP EPADS all beat their estimates. 👇

The Resilience:

Despite continued weakness in legacy advertising, Baidu's strategic pivot to AI is accelerating. The most important incremental point is that AI is now the majority of Baidu's core revenue base for the first time. Baidu Core AI-powered Business revenue reached RMB13.6bn, up 49% y/y, and accounted for 52% of Baidu General Business revenue — a major milestone that signals Baidu is no longer just a search company with AI optionality.

The Context:

Management expects the AI mix to continue rising over the next several quarters, driven by cloud, Kunlun and AI applications. AI Cloud was the clear highlight with revenue reaching RMB11.3bn, while AI Cloud Infra revenue grew 79% y/y to RMB8.8bn — faster than peers. GPU Cloud revenue accelerated further to 184% y/y, suggesting strong enterprise demand for training and especially inference workloads.

The Competitive Shift:

The margin read-through is better than the headline gross margin suggests: management indicated GPU cloud has structurally better margin characteristics than traditional CPU cloud, helped by higher technical barriers, tight high-quality supply, pricing power and Baidu's full-stack optimization capability. The long-term target — GPU cloud gross margin of 35–40% and AI infra margin of 25–30% — supports the argument that this business can scale without becoming a structurally low-margin cloud commodity business.

2. Financials / Yield 💸

1Q26 results demonstrate the accelerating AI transition with cloud infra scaling rapidly, even as legacy advertising remains under pressure. Gross profit was weaker than expected at ¥12,486M (39% margin vs. 44% Tiger est.), but operating leverage improved sharply with SG&A down -13% q/q and R&D down -19% q/q, driving operating income well above expectations.

• Reported Gross Revenue: ¥32,075M (+2% vs. consensus, +5% vs. Tiger)

• Gross Profit: ¥12,486M (39% margin, -502 bps vs. Tiger est.)

• GAAP Operating Income: ¥3,193M (10% margin, +216 bps)

• GAAP EPADS: ¥8.76 (+16% vs. Tiger est.)

• Non-GAAP EPADS: ¥12.06 (+23% vs. Tiger est.)

• Net Income: ¥3,445M (11% margin, +33% vs. Tiger est.)

• Non-GAAP Net Income: ¥4,332M (14% margin, +29% vs. Tiger est.)

3. Outlook / Forward 🔮

The Macro View:

Baidu's thesis is becoming more constructive: valuation should increasingly be anchored on AI infrastructure, domestic AI chips, AI applications and asset monetization, rather than being discounted primarily as an ex-growth search company. The AI revenue mix crossing 50% is a structural inflection point.

The Revisions:

Tiger Research is increasing 2Q Baidu Core revenue and EBIT by 7% and 22% respectively, reflecting stronger AI cloud momentum. FY26 estimates also move higher across the board.

4. Valuation 🔢

Valuation Methodology (SOTP): Tiger Research's $160 (was $150) PT is based on SOTP with a 15% holding company discount and net cash of $2.3B.

• Online Marketing: $13B on 5.0x '26 EBITDA

• Baidu Cloud: $20B on 3.3x '26E sales

• Kunlunxin (AI Chips): $11.8B

• Apollo (Autonomous Driving): $5B

• TCOM Shareholding: $3.6B

• Other Equity Investments: $2.3B

• Holding Company Discount: 15%

• Net Cash: $2.3B

• Total Enterprise Value: $37.9B

• Price Target: $160.00 (was $150.00) — +16% upside from current $137.61

Kunlun is the near-term catalyst that could make the AI re-rating more tangible. A potential HK listing remains the top priority, and Tiger Research thinks a US$50bn valuation is possible if investors give proper credit to China's domestic AI chip scarcity value, Baidu's internal demand, external customer adoption and the strategic importance of domestic AI infrastructure.

If Kunlun lists successfully and trades well post-IPO, it should provide a direct valuation marker for one of Baidu's most underappreciated AI assets, and could help $$Baidu, Inc.(BIDU)$$'s own stock re-rate. More importantly, Kunlun may not be the only unlock: if the market rewards the spin-off structure, Baidu could continue to separate and list additional assets over time, creating a broader shareholder return / asset value unlock story.

5. Key Risks 📝

• Competition: Baidu is competing with larger companies (e.g., $Alibaba(BABA)$, $TENCENT(00700)$, BYTEDANCE, and HUAWEI) in China's digital advertising and public cloud market

• Foreign company risk: US has passed the Holding Foreign Companies Accountable Act, which requires more disclosures by Chinese companies listed in the US and might impact their listing status

• Data security risk: China is tightening the data security rules and might restrict companies with sensitive data from listing overseas

• VIE risk: China might also tighten the use of a VIE (Variable Interest Entity), a corporate structure most Chinese Internet companies use to attract foreign capital and list overseas

• AD legislation risk: The commercialization of autonomous driving depends on legislation, which is not under Baidu's control

• PR risk: Safety accidents, if happen, could potentially delay $$Baidu, Inc.(BIDU)$$'s monetization of autonomous driving

📝 Summary

• Long-term constructive view: AI revenue now >50% of core business marks a structural inflection — Baidu is transitioning from "search company with AI optionality" to "AI company with legacy search cash-flow base." GPU cloud scaling at 184% y/y with 35-40% GM target supports durable profitability.

• Near-term concern: Legacy advertising remains weak (Search + Feed -21% y/y) and gross margin compression (-502 bps vs. est.) reflects the faster mix shift toward lower-mixed AI cloud infrastructure in the transition phase.

• Monitoring points: (1) Kunlun HK IPO timing and valuation — $50B marker could unlock AI re-rating; (2) GPU cloud margin trajectory toward 35-40% target; (3) Additional asset spin-off potential beyond Kunlun if market rewards the structure.

🐯 Questions for Tigers

• Valuation Anchor Shift: Will the market re-rate Baidu on AI infrastructure multiples (like cloud/semis) rather than legacy search multiples — or will the advertising drag keep the stock range-bound?

• Kunlun IPO Pricing: If Kunlun lists at a $50B valuation, how much of that value gets reflected in BIDU's SOTP — and could additional spin-offs (Apollo, other assets) follow?

• Margin Inflection: GPU cloud gross margin target of 35-40% sounds compelling, but can Baidu achieve this while scaling 184% y/y — or will competitive pricing pressure from Huawei/Alibaba compress targets?

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