Because the rising popularity of AI Stocks has lifted many of them to expensive valuations, some investors have started looking to Chinese tech stocks to find bargains in this area. However, this approach comes with some additional risks compared to investing in domestic companies, as Chinese companies often take a hit due to geopolitical disputes.
Fortunately, such disputes may not make Chinese stocks as uninvestable as some investors might think. While it is a stock-like technology giant Baidu (NASDAQ: BIDU) is not for the faint of heart, more risk-tolerant investors may find that a position in the company is worth opening.
Baidu and AI
Baidu has been on investors' radar for years because it operates China's No. 1 search engine. According to MarketMeChina, Baidu claims more than 60% of Chinese search traffic across all platforms. In the mobile-only search segment, that market share rises to 78%.
Moreover, it is not just the Chinese version of it Alphabet's Google in terms of search. Like Google's parent company, Baidu's businesses include segments covering cloud, intelligent driving and mobile. Baidu also owns Iqiyi, a YouTube-like platform that streams both user-generated videos and professionally developed content, as you might see on Netflix.
However, most of the company's AI-related potential appears to come from the AI cloud, which includes compute and storage, networking, databases, big data and security applications. This also includes the Baidu Cloud Compute (BCC) service, which is based on virtualization and distributed cluster technology.
In total, Baidu AI claims more than 5,700 patent applications, the second most in deep learning. It has also developed a “fully functional” AI chip called Baidu Kunlun. And one of its applications, the Ernie bot chatbot, now claims more than 200 million users, the company said.
Risk Factors and Baidu Stocks
However, the weak state of US-China relations has weighed on Baidu and many of its peers. These concerns became a bigger problem 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. stock exchanges. Negotiations between US and Chinese regulators finally brought the threats against Chinese companies to an end. However, given the ongoing tensions between Washington and Beijing, Baidu shareholders in the US are right to be concerned about the state of their investments.
Such concerns appear to have taken their toll on the stock. Except for a price increase and a reversal in 2021 bull marketBaidu's shares have largely traded within a range over the past five years. Furthermore, shares are down more than 25% in the past year even as the company's earnings have improved.
Furthermore, Baidu admitted that its Kunlun AI chip does not perform all its AI functions. It depended Nvidia chips to train its large language model. More recently, facing difficulties in sourcing Nvidia chips thanks to Western sanctions, Baidu moved those operations to Huawei, according to a Reuters report.
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 price-to-earnings ratio of 12. This is well below the valuation of its beleaguered US counterpart Alphabet, which trades at 27 times earnings.
Investors should also consider that there are reasons for the political leaders of both countries not to change existing business arrangements. Any deterioration would undoubtedly hurt China financially, while jeopardizing these investments would leave many American investors poorer. Both countries therefore have an incentive not to jeopardize such relations.
Should I Buy Baidu Stock?
Given its political background, Baidu is not a stock for risk-averse investors. Nevertheless, risk-tolerant investors may argue for holding a position. With its search dominance in its home market, growing AI capabilities and low valuation, Baidu would be poised for huge gains if not for the political challenges.
Additionally, the low cost of the stock likely plays a role in the political dangers Baidu faces and its dependence on Nvidia and Huawei for some of its AI. If someone wants to buy an AI stock at a low cost, Baidu could end up being a good fit for some investors' portfolios.
Should You Invest $1,000 in Baidu Now?
Consider the following before buying shares in Baidu:
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Baidu, Netflix and Nvidia. The Motley Fool has one disclosure policy.
Should Investors Buy This Forgotten, Beaten AI Stock? was originally published by The Motley Fool
