- Leverage & Inverse ETPs
- Instruments
- Why Us
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
In this current earnings season, the stocks of two Chinese companies have been on a tear after releasing their earnings. Chinese tech giant Baidu, Inc. (NASDAQ: BIDU) – which essentially has several parallels to Alphabet, Inc – announced its second quarter (Q2) earnings on the 20th of August this year. From then till the 2nd of September, Baidu’s U.S.-listed ticker rose nearly 11%.
China’s e-commerce and tech giant Alibaba (ticker: BABA) – officially known as “Alibaba Group Holding Limited” – witnessed a price surge after it released the earnings results for the first quarter (Q1) for its Fiscal Year (FY) 2026. On the day of the earnings release on the 29th (done after market close), the U.S.-listed ticker rose 13%. On the 2nd of September, it rose another 2.6%.
Now, more so than before, AI is taking center stage and essentially buoying investor sentiment in the face of challenging economic conditions in China.
Trend AnalysisFor Baidu, trends established in Q1 this year remained prevalent across Q2 as well for both top and bottom lines. If trends established in the first half (H1) of the Fiscal Year (FY) 2025 were to continue, total revenue would be largely the same as that in FY 2024. However, given lower research and development (R&D) costs, both net income and earnings per ADS (“American Depositary Share”) are trending to close the year with a 30% growth over the previous FY.
Baidu’s “Core Segment” – which mainly provides search-based, feed-based, and other online marketing services, as well as products and services from new AI initiatives – remains the largest contributor to the bottom line: it can be seen that nearly all of the bottom-line growth comes from this segment.
Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at
Source: Company Information; Leverage Shares analysis
Meanwhile, content division iQIYI’s decline in relevance to the company’s fortunes continues: despite a trend that suggests a near-equaling of revenues from last FY, expenditure remains high to the point that net income from this segment is trending to be only 10% of that in the previous FY, which itself was a period of decline. This strengthens the suggestion that, despite the company’s best efforts to cater to its customers, Chinese consumers might be continuing to tighten their belts on extraneous consumption.
Now, the “Core” segment has many inter-related sub-segments that traverse the “Cloud” business, the online ad business (which is a large portion of the “online marketing” segment) and so forth. The “Cloud” business – in particular – holds the greatest bulk of the company’s AI endeavour. In FY 2020, “Core” constituted 73% of all revenue while its “online marketing” sub-segment constituted 68%. In FY 2023, “online marketing” was down to 60%. In FY 2024, relative to “Core”‘s 79% revenue share, “online marketing” held 53%. H1 2025 mirrors the exact same trend.
The relative lack of substantial moves in revenue vis-a-vis the declining revenue share of “online marketing” suggests that Cloud initiatives such as AI are more important than the company’s long-vaunted digital ads and engagement businesses. Baidu’s CFO Haijian He stated in the earnings release that the company remains committed to its AI investments, is focusing on advancing AI transformation across the Mobile Ecosystem and sustaining healthy growth momentum in AI Cloud. Towards that, he also stated that the “Core”’s non-online marketing revenue was driven by new AI initiatives to deliver 34% year-over-year growth in its Q2 2025. By July, 64% of its mobile search result pages contained AI-generated content.
Meanwhile, at Alibaba, management reversed its 2023 decision to form into six distinct entities that could possibly be spun out into six separate companies/tickers. While the logistics arm – Cainiao – worked on an IPO since, the plan was dropped1 early in 2024. In Q1 2026, the “6 entities” plan has been effectively dissolved. In Q1 2026, Alibaba consolidated further into three main segments: the China e-commerce business now includes2 its travel platform and food delivery business while all other businesses save “Cloud Intelligence” and “International Digital Commerce” have been lumped into “All Other” in its reporting. Drawing out a trend isn’t possible until more details are released (likely in its FY report in nine months). But, for now, “Cloud Intelligence” – which represents its AI and cloud businesses – seems to be continuing to grow in contribution.
Source: Company Information; Leverage Shares analysis
Prior to the Q1 2026 reorganization, the “Cloud” segment has largely held steady at 11-12% revenue contribution over the past three FYs while its EBITA (“Earnings Before Interest, Taxes and Amortization”) had been the only steady positive contributor at the 11-12% contribution to the bottom line outside of the China e-commerce business. The China e-commerce business ran at 45-48% revenue contribution over the past three FYs while accounting for all of the balance to the EBITA.
Without accounting for inter-segment eliminations, “China e-commerce” remains the biggest EBITA contributor in Q1 2026 by a massive margin while “Cloud” grows in contribution to both top and bottom lines.
Overall, Alibaba’s “Cloud” business also underpins further growth in its Earnings Per Share (EPS):
Source: Company Information; Leverage Shares analysis
While income from operations spikes on account of continued investment in food delivery and “Cloud” businesses, improving passthroughs in “Cloud” (for the most part) and domestic e-commerce (overall) become the dominant factors behind the growth in EPS. If current trends continue, FY 2026 will close with a 64% growth over the previous FY with more-or-less the same level of revenue as the previous FY.
The top line (i.e. “revenue”) remaining the same so far stands here: with the domestic e-commerce business registering a massive growth in revenue share, it stands to reason that international commerce and other platforms/services have depreciated in providing passthroughs. “Engagement” is the name of the game in the digital space and it seems – so far – that maintaining high engagement is coming with significant cost, which likely indicates that consumer spending in China is increasingly more cautious and international engagement is proving to be problematic.
AI carried the day to essentially bring the company to an even keel in the top line: “Cloud” grew 26% year-on-year to net revenues of $4.6 billion and EBITA of $412 million, implying an “EBITA margin” of around 9%. In FY 2023, this was 4%, which had improved to 9% by FY 2025. It’s entirely likely that FY 2026 will see “Cloud” break through into the double-digit percentage range in this metric.
However, it bears noting that China e-commerce’s “EBITA margin” earned on the back of $12.46 billion in revenue is a solid 43% in Q1 2026 despite absorbing high-cost loss-making businesses into its segment. In its current earnings release, the language employed by the management suggests that they’re certainly locked in on burnishing their “Cloud” segment further.
Market Implications Going ForwardThe fact that both companies are reposing enormous faith in AI spends in the year to come and likely has been a large factor in the convictions held in these stocks. Given the perceived softness in personal consumption growth, investors interested in the China story are reposing faith in corporate spends in AI being a signal for growth in valuation, resulting in a relative narrowing of market breadth.
However, of the two, Alibaba is the relatively better-known ticker, given its massive reach within China – thus giving it ample cause for being a beneficiary of this increased focus. This is an oft-repeated pattern seen since (at least) 2022: the stock’s value has witnessed double-digit jumps a number of times before the air comes out and the stock settles down.
Both stocks’ rise in the face of a weak domestic market and wavering investor conviction mean that they will likely face significant volatility in the months to come. Towards that end, professional investors in Europe might like to consider the +3x Baidu Long ETP (BID3) for magnified exposure during upticks of the Baidu’s U.S.-listed ticker’s trajectory while the -1x Baidu Short ETP (BIUS) is the equivalent of a short position without the need for maintaining a margin. In a similar vein, the +3x Alibaba Long ETP (BAB3) provides magnified exposure that should be useful during the upsides of the U.S. ticker’s performance while the -3x Short Alibaba ETP (BA3S) is of similar utility during the downsides.
Footnotes:
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
Share this:
INVESTOR TYPE:
LOCATION:
Never miss out on important announcements. Get premium content ahead of the crowd. Enjoy exclusive insights via the newsletter only.
