As the growing popularity of AI Actions While the situation has driven many to high valuations, some investors have begun to look to Chinese technology stocks to find bargains in this area. However, this approach carries additional risks compared to investing in domestic companies, as Chinese companies often see their businesses suffer due to geopolitical conflicts.
Fortunately, such disputes may not make Chinese stocks as uninvestable as some investors might think. While a stock like tech giant Baidu (NASDAQ:BIDU) is not for the faint of heart, more risk-tolerant investors may conclude that a position in the company is worth opening.
Baidu and AI
Baidu has been on investors’ radar for years because it operates the No. 1 search engine in China. According to MarketMeChina, Baidu claims more than 60% of Chinese search traffic across all platforms. In the mobile-only search segment, this market share rises to 78%.
Moreover, there is not only the Chinese version of AlphabetIt’s Google in terms of search. Like parent company Google, Baidu’s businesses include segments spanning cloud, smart driving and mobile. Baidu also owns Iqiyi, a YouTube-like platform that streams both user-created videos and professionally developed content, as seen on Netflix.
However, most of the company’s AI potential appears to come from its AI cloud, which encompasses compute and storage, networking, databases, big data and security applications. This also includes its Baidu Cloud Compute (BCC) service, based on virtualization and distributed cluster technology.
In total, Baidu AI claims more than 5,700 patent applications, placing it second in the deep learning field. It also developed a “full function” AI chip called Baidu Kunlun. And one of its apps, the Ernie bot chatbot, now claims more than 200 million users, according to the company.
Baidu Risk Factors and Actions
However, the precarious state of relations between the United States and China has weighed on Baidu and many of its peers. Those concerns became more of an issue for investors when the U.S. Securities and Exchange Commission warned in 2022 that if the company failed to meet audit requirements, it would be delisted from U.S. exchanges. Negotiations between U.S. and Chinese regulators have finally ended delisting threats against Chinese companies. However, given ongoing friction between Washington and Beijing, Baidu shareholders in the United States are right to be concerned about the state of their investments.
Such concerns appear to have taken a toll on the stock. Except for a surge in prices and a reversal during 2021 bull market, Baidu stock has mostly traded in a range over the past five years. Additionally, over the past year, the stock has fallen more than 25%, even as the company’s profits have improved.
Additionally, Baidu admitted that its Kunlun AI chip does not perform all of its AI functions. It depended on Nvidia chips to train its large language model. More recently, due to its difficulties purchasing Nvidia chips due to Western sanctions, Baidu transferred this business to Huawei, according to a Reuters report.
Indeed, given the risks to the company, Baidu shares should probably trade at a discount. However, the market may have overestimated the danger.
Currently, Baidu trades at a P/E ratio of 12. This figure is well below the valuation of its struggling US peer Alphabet, which trades at 27 times earnings.
Investors should also consider that there are reasons for political leaders in both countries not to change existing trade agreements. Any deterioration would undoubtedly hurt China financially, while endangering these investments would impoverish many American investors. Both countries therefore have an interest in not endangering such relations.
Should I buy Baidu stock?
Given the political environment, Baidu is not a stock for risk-averse investors. Nonetheless, risk-tolerant investors can justify maintaining a position. With its search dominance in its domestic market, growing AI capabilities and low valuation, Baidu would be poised for massive gains if not for the political challenges.
Additionally, the stock’s low cost likely reflects the political dangers Baidu faces and its reliance on Nvidia and Huawei for some of its AI. Ultimately, if one is looking to buy low-cost AI stocks, Baidu might be a good fit for some investors’ portfolios.
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Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Will Healy has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Alphabet, Baidu, Netflix and Nvidia. The Mad Motley has a disclosure policy.
Should Investors Buy This Forgotten and Beaten AI Stock? was originally published by The Motley Fool
