Preserving Key Details Amid Mounting Woes at Alibaba Group Holding
In the ever-evolving realm of China’s technology industry, Alibaba Group Holding has long held the mantle. However, it appears that investors now have a more enticing option in the form of Baidu stock.
Renowned as China’s equivalent to Google, Baidu (ticker: BIDU) primarily operates in the fields of online search and advertising. Nevertheless, its recent foray into artificial intelligence (AI) has garnered significant attention – and rightfully so.
Baidu’s AI endeavors encompass various domains such as cloud computing, autonomous taxis, and an Ernie-powered chatbot that rivals ChatGPT. Just this month, Baidu unveiled a premium tier of its Ernie offering, empowering cloud enterprises to create their own intelligent applications. Morningstar analyst Kai Wang has earmarked both Baidu and Alibaba (BABA) as the two primary Chinese beneficiaries of this year’s hottest tech trend.
Co-founder and CEO Robin Li emphasized that Baidu’s business and product strategies, centered around AI, position the company for prolonged revenue and profit growth. This sentiment was echoed in the company’s third-quarter financial results, where Baidu not only surpassed analysts’ expectations with earnings of 20.40 Chinese yuan ($2.86) per share and revenue of 34.5 billion yuan ($4.8 billion), but also witnessed a year-over-year increase of 21% and 6% in per-share profit and revenue respectively. Following the announcement, Baidu stock experienced a 1.9% surge.
Nonetheless, a few challenges persist. Baidu stock has depreciated by 0.8% this year, a stark contrast to the 55% surge observed by Google parent company Alphabet (GOOGL) due to headwinds faced by Baidu’s core advertising business caused by China’s economic slowdown. Online retail, a significant contributor to Baidu’s revenue, has suffered from weakened consumer demand.
Amidst These Turbulent Times, Baidu’s Potential Shines
China’s Economic Slowdown and Challenges Facing Baidu
Baidu, one of China’s leading tech companies, is grappling with various concerns amidst the country’s economic slowdown. Since the regulatory crackdown on the sector began in late 2020, Baidu’s stock has plummeted by two-thirds from its peak in early 2021. This decline is not unique to Baidu, with many other Chinese tech firms experiencing similar challenges.
Adding to the pressure, U.S.-China tensions have further intensified problems for Chinese tech companies. The recent imposition of expanded U.S. export controls on semiconductors aims to limit Beijing’s access to AI chips, causing significant disruptions for industry players like Alibaba.
Alibaba particularly suffered from these export controls, acknowledging the negative financial impact resulting from the new regulations. As a result, Alibaba had to abandon its highly anticipated spinoff of its cloud computing and AI unit. This move was a blow to the company’s restructuring plan for the year, which was a key factor driving positive expectations for their stock.
In comparison, Baidu appears to be in a better position. During an earnings call, Baidu CEO Robin Li assured investors that the company had stockpiled enough supply to meet its needs for the next one or two years. Furthermore, Li emphasized that there are alternative options available, such as chips produced by Nvidia, which can sustain the company’s operations effectively. Analyst Bo Pei from U.S. Tiger Securities believes that the chip ban could slow down the overall development of the AI industry in China. However, it could also benefit major players like Baidu, as fewer competitors will have access to sufficient computing power.
For those willing to consider investing in Chinese tech, Baidu presents itself as an attractive option. The company’s core business enjoys a competitive advantage and is closely tied to China’s economic growth. However, it is important to note that Baidu is not immune to macroeconomic cycles, which can impact its performance. With Alibaba facing significant challenges, Baidu emerges as the primary player in the Chinese AI market. It is crucial to be aware, though, that geopolitical risks are likely to persist for the foreseeable future.
These challenges are reflected in Baidu’s stock valuation, making it a potentially compelling opportunity. The stock currently trades at just 10.6 times next year’s earnings estimates, providing a 30% discount compared to its peers, such as Tencent Music Entertainment and Xiaomi.
Considering these factors, Baidu represents an enticing investment choice for those interested in Chinese tech, with its discounted valuation making it particularly appealing.
