A 48% drop in net profit from a year earlier overshadowed Baidu’s record revenue in the fourth quarter of 2023, which was led by advertising income, but also featured a minor contribution from earnings related to artificial intelligence. Baidu’s Hong Kong-traded stocks have plunged nearly 30% since last July.

Why it matters: A 6% year-on-year increase in advertising revenue is the main driver of the search engine giant’s revenue growth, as Baidu’s hopes that AI will serve as a significant revenue stream remain unconvincing to investors, in contrast to US tech firms that saw a share uptick based on an AI boom last year. 

Details: Baidu’s AI model and ERNIE chatbot added RMB 656 million ($91.2 million) to revenue in the fourth quarter of 2023, CEO Robin Li told investors on the firm’s earnings call, with incremental revenue expected to jump to several billion yuan in 2024.

• Li revealed that inference costs for the basic free-to-use ERNIE Bot 3.5, used to analyze how much computing is needed to generate output based on prompts,  are down 99% compared to last March. 
• ERNIE Bot 4.0, the paid version rolled out in October, remains Baidu’s most advanced generative AI bot. The chips Baidu has on hand are expected to advance the flagship bot to the “next level,” said Li.
• Baidu’s increased investment in and commitment to AI is also reflected in the fact that its R&D costs climbed 11% to RMB 6.3 billion last quarter. The company released data showing that its homegrown AI service has attracted a sizable number of business customers, reaching 26,000 as of December.

Context: Baidu’s ChatGPT-style service has recorded more than 100 million users given its first-mover advantage and integration with China’s largest search engine,. But competition has increased, as Baidu’s tech counterparts in the country have also bet strongly on generative AI and there are an increasing number of AI startups that have received large amounts of funding from its rivals, such as Moonshot AI.