11:51 AM EDT, 07/16/2024 (MT Newswires) -- Baidu's ( BIDU ) advertising business likely remained weak and kept Q2 core revenue largely flat on a year-on-year basis amid macroeconomic headwinds and the company's shift towards artificial intelligence, Morgan Stanley said.

The investment firm, however, said the Chinese search engine company's cloud service is a "bright spot" and its robotaxi business is seeing some "notable progress."

"We expect cloud growth of 15% YoY with a more normalized base as smart transportation impact subsides gradually," Morgan Stanley said in a note sent Tuesday. "We expect cloud profitability to be sustained with an improving product mix."

The firm expects Baidu's ( BIDU ) core non-GAAP operating profit to be up 2% in Q2 while margins are projected to be largely stable.

Potential collaborations between Baidu's ( BIDU ) Ernie Bot, its generative AI product and knowledge-enhanced large language model, and Apple as well as confirmed partnerships including with Samsung should further support Baidu's ( BIDU ) AI cloud growth, the firm said.

"Robotaxi is seeing some meaningful progress, but financial impact is limited," the firm said, citing reports that Baidu ( BIDU ) has received a fully driverless robotaxi license in Shanghai while daily order volume has surged in Wuhan.

Morgan Stanley maintained its equal-weight rating on Baidu ( BIDU ) while trimming its price target to $115 from $125, saying it remains "cautious amid a tepid core ads recovery and [does] not see inflection in the near term."

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