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Ernie Bot, China’s answer to ChatGPT, can answer all sorts of difficult questions for users. For investors, this is an answer to the slowing growth facing manufacturer Baidu. But the plunge in the Chinese search giant’s stock price on Monday reflects how vulnerable the local technology sector is.
Baidu’s stock price fell 12%, the most in a year, following reports that the company’s Ernie artificial intelligence platform was linked to important Chinese military research. The report claimed that a laboratory attached to a unit of the People’s Liberation Army that oversees cyber warfare tested the AI system on Ernie. Baidu denied any affiliation or partnership with the institute and said it had no knowledge of the research project.
Nevertheless, this significant decline reflects two concerns. The first is how important Baidu’s chatbots will become to future revenue. The second is how much its earnings outlook is currently influenced by the United States.
Baidu has been recognized as China’s leading AI developer in recent months thanks to the launch of Ernie Bot. As China’s first answer to OpenAI’s ChatGPT, the chatbot gives Baidu a first-mover advantage over much larger technology rivals such as Tencent.
Since its public launch in August, Ernie Bot has amassed over 100 million users as of the end of 2023. Baidu’s launch quarter revenue has already exceeded expectations. According to the company’s results for the final quarter of last year, advertising revenue from chatbots is expected to increase.
This is a once-in-a-lifetime opportunity for the company to make a comeback after years of fierce competition for advertising dollars. The huge popularity of China’s giant short video platform has hurt Baidu’s core online marketing sales. Search growth began to slow more than a decade before his.
Strong demand for Erniebot and related services will also drive Baidu’s other businesses, such as cloud services and smart cars.
But it all depends heavily on funding and access to advanced technology. The US has already banned investment in some areas of China’s high-tech sector, including AI. An even bigger blow is that access to the chip is cut off. Export regulations for advanced chips used in AI development and the equipment used to manufacture them are becoming stricter and are proving difficult to circumvent. Monday’s report reignited concerns about increased sanctions by the U.S. government.
Baidu’s stock price has fallen by a quarter over the past year, and it trades at just 10 times forward earnings, less than half that of global peers such as Google. As long as geopolitical uncertainty remains high, China’s AI candidates may struggle to perform well.
Lex is the FT’s concise daily investment column. Expert writers from four global financial centers provide timely, informed opinion on capital trends and big companies.Click to explore