2Q26 Preview: AI Investments to Weigh on Core OP

Research evidence excerpt

2Q26 Preview: AI Investments to Weigh on Core OP

IdeaM

Risk Reward – Baidu Inc (BIDU.O)

KEY EARNINGS INPUTS

Drivers Dec 2025 Dec 2026e Dec 2027e Dec 2028e

SG&A Expense as % of Revenue (%) 32.6 16.8 16.5 16.1

R&D Expense as % of Revenue (%) 15.8 16.7 17.1 17.4

INVESTMENT DRIVERS RISKS TO PT/RATING MS ESTIMATES VS. CONSENSUS

End-consumption demand recovery that boosts RISKS TO UPSIDE FY Dec 2026e

ad budgets Stronger core business recovery driving better 11,239 Continued customer acquisitions by deeper top-line growth EBIT

penetration of lower-tier cities and an expanding Solid margin expansion from investment (Rmb, mn) 10,650.0 21,333.0

product portfolio discipline and cost control 15,400.7

Apollo and DuerOS to be baked into valuation in Materialization of AI and robotaxi initiatives

the near to medium term 20,333

RISKS TO DOWNSIDE EBITDA

19,036.0 30,415.3

Intensifying competition in search and online (Rmb, mn)

GLOBAL REVENUE EXPOSURE 23,649.4 video, driving up TAC and more aggressive

content investments

AI-related adoption failing to ramp up in China 14,063 0-10% UK Net income

AI disruption risk to search 10,289.0 23,619.0 90-100% Mainland China (Rmb, mn)

17,825.7

OWNERSHIP POSITIONING

Source: Morgan Stanley Research Estimate

View explanation of regional hierarchies here Inst. Owners, % Active 75.7% EPS 41.1 67.1

(Rmb)

HF Sector Long/Short Ratio 2.6x 53.6

MS ALPHA MODELS HF Sector Net Exposure 12.3%

Mean Morgan Stanley Estimates

Source: Refinitiv, Morgan Stanley Research 2/5 24 Month 5/5 3 Month Refinitiv;exposuresMSPBheld withContent.MSPB.IncludesInformationcertainmayhedgebe fund

BEST Horizon MOST Horizon inconsistent with or may not reflect broader market

trends. Long/Short Ratio = Long Exposure / ShortSource: Refinitiv, FactSet, Morgan Stanley Research; 1 is