As the surging popularity of AI stocks has lifted many of them to pricey valuations, some investors have begun looking at Chinese tech stocks to find bargains in this space. However, that approach carries with it some extra risks compared to investing in domestic companies, as Chinese companies often find their businesses taking hits due to geopolitical disputes.
Fortunately, such disputes may not make Chinese stocks as uninvestable as some investors might assume. 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 the radar of investors for years as 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 Alphabet's Google in terms of search. Like the Google parent, Baidu's operations include segments covering the cloud, intelligent driving, and mobile. Baidu also owns Iqiyi, a YouTube-like platform that streams both user-created videos and professionally developed content like one might see on Netflix.
However, most of the company's AI-related potential would seem to come from its AI cloud, which encompasses compute and storage, networks, databases, big data, and security applications. This also includes its 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 the deep learning field. It has also developed a "full function" AI chip called Baidu Kunlun. And one of its applications, the Ernie bot chatbot, now claims more than 200 million users, according to the company.
Risk factors and Baidu stock
However, the tenuous state of U.S.-China relations 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 auditing requirements, it would be delisted from U.S. stock exchanges. Negotiations between U.S. and Chinese regulators eventually put the delisting threats against Chinese companies to bed. However, given the ongoing friction between Washington and Beijing, Baidu shareholders in the U.S. are right to be concerned about the state of their investment.
Such worries seem to have taken a toll on the stock. Except for a surge in the price and a reversal during the 2021 bull market, Baidu stock has mostly traded in a range over the last five years. Also, during the past year, the stock has fallen by more than 25% even as the company's profits have improved.
Additionally, Baidu admitted that its Kunlun AI chip does not run all its AI functions. It had depended on Nvidia chips to train its large language model. More recently, due to its difficulties in buying Nvidia chips thanks to Western sanctions, Baidu has shifted this business to Huawei, according to a report from Reuters.
Indeed, considering the risks to the business, Baidu stock likely should trade at a discount. However, the market may have overestimated the danger.
Currently, Baidu trades at a P/E ratio of 12. This is well under the valuation of its beleaguered U.S. counterpart Alphabet, which trades for 27 times earnings.
Investors should also consider that there are reasons for political leaders of both countries not to alter existing business arrangements. Any deterioration would undoubtedly hurt China financially while endangering these investments would make many American investors poorer. Thus, both countries have an incentive not to endanger such relationships.
Should I buy Baidu stock?
Given the political backdrop, Baidu is not a stock for risk-averse investors. Nonetheless, risk-tolerant investors can make a case for holding a position. With its dominance in search in its home market, growing AI capabilities, and low valuation, Baidu would be poised for massive gains if not for the political challenges.
Moreover, the stock's low cost likely factors in the political dangers faced by Baidu and its dependence on Nvidia and Huawei for some of its AI. Ultimately, if one is looking to buy an AI stock at a low cost, 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 Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Baidu, Netflix, and Nvidia. The Motley Fool has a disclosure policy.
