Moody’s Ratings has on last Thursday revised the outlook on Chinese technology company Baidu Inc.’s A3 issuer and senior unsecured ratings to negative from stable.
Moody’s said in a statement that the negative outlook reflects the company’s subdued revenue growth, pressure on profitability, elevated financial leverage, and negative free cash flow driven by a significant ramp-up in artificial intelligence (AI)-related investment over the next 12-18 months.
The outlook also reflects the execution risks the company faces in monetizing its AI-powered businesses and stabilizing its search business, amid intense competition.
“The negative outlook reflects Baidu’s subdued revenue growth, pressure on profitability, elevated financial leverage, and negative free cash flow driven by significant AI-related investment spending,
“The outlook also reflects execution risks around monetizing its AI-powered businesses while stabilizing its search business, amid intense competition,” said Shawn Xiong, a Moody’s Ratings Senior Vice President.
He noted the ratings affirmation reflects Baidu’s strong balance sheet, which provides the company with financial flexibility during its AI investment cycle.
“We expect continued progress in AI monetization and gradual stabilization of its search business, which could support earnings and credit metrics over the next 12-18 months,” he added.
Baidu’s A3 issuer rating reflects the company’s position as one of China’s (A1 stable) leading AI companies and providers of online advertising services.
The rating also considers the company’s more diverse business profile, and track record of recovering from business transitions.
These strengths are counterbalanced by the company’s exposure to China’s competitive internet market, the time needed for transforming and stabilizing its search business, and its ongoing investment requirement as it continues expanding its AI-powered platform.
Moody’s expects Baidu’s revenue to decline moderately in 2026 before returning to growth over the next 12-18 months.
Growth in the company’s AI-powered businesses will partially offset weakness in its search business, and support a gradual recovery in overall revenue growth.
Baidu’s overall revenue declined 4 percent for the last twelve months ended June 30, 2026, following declines of 3 percent in 2025 and 1 percent in 2024.
The continued weakness was primarily driven by the sustained decline in its online marketing services revenue.
While revenue from its AI-powered businesses grew 37 percent in the first half of 2026, this was offset by a 26 percent decline in its search business and a 9% decrease in revenue at its online video subsidiary iQIYI.
The company’s search business revenue decline is attributed to the ongoing AI search transformation and competitive pressure from other online marketing formats.
Nevertheless, the company has demonstrated some progress in its search transformation and monetization with its search business improving slightly quarter-on-quarter in the second quarter of 2026.
Despite this progress, there is uncertainty around both the pace of revenue stabilization and the eventual margin profile, said Moody’s.
Baidu’s AI-powered businesses contributed over 50 percent of its general revenue in the first half of 2026, up significantly from 37 percent over the same period in 2025.
The increasing contribution of these businesses has diversified Baidu’s revenue stream and has reduced the company’s reliance on its search business.
Notwithstanding the growing contribution, its AI-powered businesses currently carry lower margins than those of Baidu’s historically high-margin search business, resulting in a decline in consolidated margins.
As such, Moody’s forecasts Baidu’s adjusted EBITDA margin will decline to around 26%-27% over the next 12-18 months.
Baidu’s capital spending increased significantly to RMB 17 billion ($2.54 billion) for the first half of 2026 from RMB 7 billion a year earlier, driven by continued investment in AI infrastructure and computing capacity.
The elevated level of AI-related investment has led to negative free cash flow and higher funding needs, resulting in total adjusted debt increasing to RMB 113 billion as of June 30, 2026, from RMB 97 billion at year-end 2025.
Combined with weaker profitability, its adjusted debt/earnings before interest, taxes, depreciation, and amortization (EBITDA) increased to 3.3 times for LTM-June 2026 from 2.5 times in 2025.
Sustained AI-related investment will likely keep free cash flow negative over the next 12-18 months and, together with our forecast of weak revenue growth and margin pressure, will keep the company’s adjusted debt/EBITDA in the range of 3.3 times to 3.5 times, according to Moody’s.
It highlighted that Baidu has excellent liquidity with a track record of solid net cash position.
The company had around RMB 166 billion in cash, cash equivalents and short-term investments at the end of June 2026, compared with RMB 34 billion in debt (including a RMB 3.6 billion short-term operating lease liability) maturing over the next 12 months.
Moody’s expects Baidu’s operating cash flow and resources will adequately cover its capital expenditure needs.
Meanwhile, an upgrade of Baidu’s ratings is unlikely at present, given the negative outlook, said Moody’s.
The rating agency could revise the outlook to stable if Baidu demonstrates sustained strong revenue growth in its AI-powered business, stabilization of its search businesses and capital spending discipline, leading to improved earnings, margin recovery and a narrowing free cash flow deficit.
Baidu’s ratings could be downgraded, if the company fails to grow its EBITDA as a result of weakening market position and declining market share, weighing on revenue growth, margin recovery and cash flow generation; pursues aggressive investments or acquisitions that strain balance sheet liquidity or raise its overall risk profile; or faces significant capital calls from its subsidiaries, said Moody’s.
Financial metrics indicative of a downgrade include adjusted debt/EBITDA failing to trend towards 2.5 times to 3 times or a net debt position, both on a sustained basis.
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