(Bloomberg) — Baidu Inc.’s results beat estimates after China’s internet search leader expanded into new businesses such as AI to shield itself from an economic downturn.

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Sales grew 6% to 34.4 billion yuan ($4.8 billion) from July to September, versus the 34.2 billion yuan projected by analysts. Net income came to 6.7 billion yuan in the September quarter, versus the 4.4 billion yuan expected.

Baidu’s results may help assuage concerns about the world’s biggest internet arena after years of Covid-era malaise. Investors worry that the Chinese economy is in danger of entering a deflationary spiral, a fear reinforced by lackluster spending on e-commerce platforms during the just-concluded Singles’ Day shopping bonanza. Sandy Xu, the CEO of online mall JD.com Inc., will join its board as an independent director, Baidu said in its statement.

The company this year delivered China’s first major riposte to OpenAI’s ChatGPT, igniting a race by domestic rivals from Alibaba Group Holding Ltd. to Tencent Holdings Ltd. to show off their own generative AI platforms. Baidu’s Ernie Bot has amassed 70 million users three months after its public roll-out, and the company claims its self-developed model has matched GPT-4 in terms of general capabilities.

Billionaire founder Robin Li has warned against China’s so-called “war of a hundred models,” where big tech players and venture investors alike pour billions of dollars into startups building AI models from scratch — many of them atop the same open-sourced code.

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It’s “a huge waste of society’s resources,” Li said at a Shenzhen event last week. “We need AI-native applications with millions of users, but not hundreds of AI models.”

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Baidu, for its part, has infused Ernie into its flagship products from search to maps and file-sharing, and the company now charges a monthly subscription fee of about $8 to users of its latest chatbot.

What Bloomberg Intelligence Says

Revenue in Baidu’s core business — excluding iQIYI — is set to remain flat on the previous quarter at 3.8 billion yuan, highlighting a lack of sequential forecast growth in the business, despite new contribution from the ERNIE Bot generative AI tool which remains immaterial. Its operating margin looks set to rise modestly in 3Q, though we see growing downside risks from rising promotional and investment costs in the AI business. Slowing growth in China’s broader economy poses the greatest near-term risk to Baidu’s business, with advertising revenue exposed to a further reduction in business confidence in the country.

– Robert Lea and Tiffany Tam, analysts

The Biden administration’s effort to prevent Beijing from obtaining cutting-edge chips for military applications are now affecting China’s tech titans in unexpected ways. Tencent and Alibaba both said on earnings calls last week their cloud computing arms could take a hit from stricter US chip curbs. Those sanctions played a part in Alibaba’s stunning about-face on plans to spin off its cloud arm.

Near-term, Baidu still counts on advertising as its bread-and-butter. Short-video platforms including ByteDance’s Douyin remain a threat as they lure users and marketers away. Last year, Baidu’s share of Chinese mobile users’ screentime remained largely unchanged at 8%, while ByteDance increased its slice to 25%, according to QuestMobile data.

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