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Why Baidu Sold Its Delivery Business

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Net profit rises 156%

In 3Q17, Baidu (BIDU) saw other net income of 4.2 billion yuan (about $636 million), which mainly came from the disposal of its delivery business. Proceeds from the sale of the delivery business boosted Baidu’s net profit in 3Q17 to 7.9 billion yuan (about $1.2 billion), representing a rise of 156% YoY (year-over-year). Domestic online advertising rivals Tencent (TCEHY) and Alibaba (BABA) saw their profits rise 67% and 146% YoY, respectively, in 3Q17.

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Freeing up resources and attention

Baidu’s delivery business was sold to Ele.me, a delivery startup backed by Alibaba. While the sale of the delivery business unlocked funds that Baidu could use to invest in more growth, the primary reason for disposing of the business was not to monetize it. Instead, Baidu viewed the disposal of its delivery operations as a way to free up funds and management’s attention so that it could focus on more important programs such as artificial intelligence (or AI).

Spinning off the delivery business will likely save cash for Baidu, which it can funnel towards strong synergies. Baidu is developing self-driving technology (QQQ) and aims to have a fully autonomous bus on the road in China (MCHI) by next year.

The company is investing about $1.5 billion annually in research and development, and a significant portion of that figure is dedicated to AI research. Baidu’s AI focus has heightened since the company hired former Microsoft (MSFT) executive Qi Lu as chief operating officer. Accenture and Wells Fargo Securities estimate that AI technology could add $14 trillion to the economies of 12 of the world’s most developed countries by 2035.

Diversifying revenue streams

Boston Consulting Group estimates that global annual sales of autonomous vehicles could hit $77 billion by 2035. Baidu is competing with Tesla (TSLA), Uber, Apple (AAPL), and Alphabet’s (GOOGL) Waymo for the revenue opportunity. For Baidu and Alphabet, venturing into autonomous driving is largely viewed as part of diversifying their revenue streams.

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